Z94.7 ENGINEERING ECONOMY

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RATE OF RETURN (INTERNAL RATE OF RETURN). (1) The interest rate earned by an investment.  (2)  The interest rate at which the present worth equation (or the equivalent annual worth or future worth equations) for the cash flows of a project or project increment equals zero.  (3)  As used in accounting, often it is the ratio of annual profit, or average annual profit, to the initial investment or the average book value. 

RATE OF RETURN, EXTERNAL. A rate of return calculation which employs one or more supplemental interest rates to produce equivalence transformations on a portion or all of the cash flows and then solves for rate of return on that equivalent cash flow series.

REAL DOLLARS. (See CONSTANT DOLLARS.) 

REPLACEMENT POLICY. A set of decision rules for the replacement of facilities that wear out, deteriorate, become obsolete, or fail over a period of time. Replacement models generally are concerned with comparing the increasing operating costs (and possibly decreasing revenues) associated with aging equipment against the net proceeds from alternative equipment. 

REPLACEMENT STUDY. An economic analysis involving the comparison of an existing facility and one or more facilities with equal or improved characteristics proposed to supplant or displace the existing facility. 

REQUIRED RETURN. The minimum return or profit necessary to justify an investment. Often it is termed interest, expected return or profit, or charge for the use of capital.  It is the minimum acceptable percentage, no more and no less.  (See COST OF CAPITAL, CUTOFF RATE OF RETURN, MINIMUM ATTRACTIVE RATE OF RETURN.)

RETIREMENT OF DEBT. The termination of a debt obligation by appropriate settlement with the lender. The repayment is understood to be in full amount unless partial settlement is specified. 

RISK. (1) Exposure to a chance of loss or injury. (2)  Exposure to undesired economic consequences.

RISK ANALYSIS. Any analysis performed to assess economic risk.  Often this term is associated with the use of decision trees. (See DECISIONS UNDER RISK, DECISION TREE.)

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