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You would compare lathe 3 and 4 since lathe 3 is the current best-option. If the Incremental IRR for lathe 4 (compared to lathe 3) was less than the MARR, then lathe 3 would remain the leading choice. If there was a lathe 5, you would then calculate the Incremental IRR for lathe 5 (compared to lathe 3)... then repeat this process, always comparing the current leading choice to the next option. I hope this makes sense.

@@michaeljustason1144 Thank you good sir, phenomenal explanation.

Indeed - an excellent explanation!

Happy to hear this! Good luck in your course!

Or inflow = outflow?

Yes and no. Yes, for these types of problems we are equating inflow and outflow, BUT, we do it using the principles of the time value of money... fancy way of saying we account for the effects of compound interest associated with the timing of each cash flow.

@@EngineeringEconomicsGuy Thank you for clarification!

You are most welcome!

You are absolutely correct! I will pin this comment to the top for others. Thank you.

This question is extremely important. For Incremental IRR you must start the comparisons with the alternative with the lowest initial investment. The Incremental IRR for each subsequent alternative then becomes an implied comparison between the Incremental Return on the next highest investment and the MARR. The question being answered is "is it better to choose the higher investment alternative, or is it better to invest that "incremental amount" in some other unknown project that earns a return equal to the MARR. This is sometimes tricky logic for students. Please watch the video again and listen closely to the dialogue; I do explain it. Hopefully, the idea clicks for you. Good question.

Sorry, I didn't see you comment for some reason. You definitely need to know the depreciation rate! Maybe your question uses another clue such as the "Asset Class"; this would be an indirect way of specifying the depreciation rate...

Great to hear! Thanks for the comment.

You are so welcome!

Good question and a common error. Draw a cash flow diagram. Remember to start counting years at the number zero! The A/F for 100 should have n=1, and the A/F for 200 should have n=2. I hope this helps!

@@EngineeringEconomicsGuy, yes, it does. Thank you. I think it is safer to move them all to PW, like you did, or some FW prior to applying either A/p or A/F. Sir, I owe everything to you as far as engineering economics is concerned. Thank you so much...

Thanks a lot!

This problem is illustrating how to deal with cash flows that occur MORE frequently than the compounding period. The point of the example is to show at you MUST simple add the dollar amounts of the payments together since there are no interest calculations occuring at the time of the payments...so it is correct to simply add the numbers. Watch the video again and listen to the explanation very carefully. The video is correct. Perhaps the purpose of the video is what is unclear?

Yes. What you've said is correct. Also, using linear interpolation can be slow and tedious. Excel has a built-in function called "IRR"- this is by far the easiest way to solve these problems! Although, understanding linear interpolation can be useful for engineering students in other courses, and it does help students understand numerical methods for solving problems, even though this is very basic.

Thanks for finding the humour!

Ha! Your question challenges the conventions of nominal and effective interest rates. We typically never have a compounding period longer than 1 year. BUT, just for fun, if we assume the word 'nominal' still refers to a 1-year timeframe (a reasonable assumption), then I think you could simply use a rate of 14% when you do the interest calculations every 2-years. If you back-calculate an 'effective' yearly rate the question you would ask is, "what effective yearly rate compounded twice would give 14% ?"... Perhaps the answer is 6.77% ? [ i.e. (1 + 0.0677)^2 -1 = 0.14 ] Others should feel free to comment on this!! Thanks for the interesting question.

Glad it was helpful!

You're welcome!

Yes, in fact, when done correctly all three methods always lead to the same conclusion.

@@EngineeringEconomicsGuy Thanks a bunch!!!

My pleasure!

I suggest you focus on the following two topics: nominal and effective interest rates; patterns of payments and the related compound interest factors. If you can master these 2 concepts, you can do just about anything in engineering economy. You might also benefit from one of my 'Time value of money' videos. Please go to my main RUclips Channel page and explore the playlists. Send me a comment when you see something you don't understand. I will try to help you!

Thank you for taking the time to write such a wonderful comment. Congratulations on your course!

I'm very flattered by your comment- thank you! And, congratulations on passing your course!

Happy to help. Good luck in your course!

Thank you for the wonderful comment! It is very nice to hear from other educators and to know that my style of teaching provides a useful example!

Glad it was helpful!