Ten years ago, JD and his colleagues resigned from a major aerospace corporation, after many years of salaried employment, to form JRG Solar, Inc. with the intent to make a significant impact on the inter­national renewable energy market based on years of design and test work in neighborhood garages of the three partners. Additionally, they hoped to make at least 10% per year on their own and other investors’ financial commitment to JRG Solar. They were suc­cessful in obtaining $12 million in capital funding to start the business. JD, who has always been the one most interested in the economic return side of the business, recently looked at the 10-year NCF series of JRG Solar (shown below in $1000 units). When he did a quick analysis on a spreadsheet, he saw that the IRR over the 10

Question

years was 11.26% per year. He was very pleased with this return; however, he noticed that the NCF and cumulative cash flow (CCF) series both indicated multiple i* values.



During this 10-year start-up phase of JRG Solar, the average investment rate for positive cash flows has averaged 4% per year. Since the investment rate is quite low for corporate retained earnings, and because the two rules-of-sign-changes indicate multiple roots to the ROR equa­tion, JD wants to understand the results of an ROR analysis beyond that of the simple ROR re­sult (i* = 11.26%) that he obtained using the IRR function on the NCF series. Perform an ROIC analysis for JD to determine if JRG Solar’s own­ers are realizing the MARR of 10% per year that they anticipated.

Answer 1

ROIC analysis results in i" = 11.26%, same as the IRR result. The MARR of 10% is being met and the company is effectively using the funds invested in it.