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ERR with MARR = ε = 10%

Short answer

ERR = 10.81% > MARR 10%, so project is acceptable. PW of outflows Rs 837,566, FW of inflows Rs 1,399,020 over 5 periods.

Use ERR method to evaluate the project with following cash flow. MARR = ε = 10%.

Year1st2nd3rd4th5th6th
Cash flow-8,00,0002,00,0002,00,000-50,0004,00,0004,00,000

The periods are labelled 1st to 6th year, so the first cash flow is taken as the start (time 0) and the last is 5 intervals later (N = 5). ERR is not affected by shifting every flow by the same period count. ε = MARR = 10%.

 period: 1st      2nd     3rd     4th     5th     6th
 CF    : -8,00,000 +2,00,000 +2,00,000 -50,000 +4,00,000 +4,00,000
 time  :  0         1        2        3        4        5

Step 1: PW of outflows at ε = 10% (to time 0)

PW = 8,00,000 + 50,000 (P/F, 10%, 3) = 8,00,000 + 50,000 × 0.7513 = Rs 837,566

Step 2: FW of inflows at ε = 10% (to time 5)

  • 2,00,000 (F/P, 10%, 4) = 2,00,000 × 1.4641 = 292,820
  • 2,00,000 (F/P, 10%, 3) = 2,00,000 × 1.3310 = 266,200
  • 4,00,000 (F/P, 10%, 1) = 4,00,000 × 1.1 = 440,000
  • 4,00,000 = 4,00,000
  • Total FW = Rs 1,399,020

Step 3: ERR

(1 + ERR)^5 = 1,399,020 / 837,566 = 1.6703

ERR = (1.6703)^(1/5) − 1 = 10.81%

Answer: ERR ≈ 10.81% > MARR 10%, so the project is acceptable (only just).

✓ Answer checked by Claude Opus 5.5 (high effort)

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