Question

"Consider the project balances for a typical investment project with a service life of four years. The 'An' for years 0 through 4 are: ($) -12,000 -- -- 3,258 -- The symbol '--' represents missing numbers, not 0. The project balance at the end of the given years (n = 0 through 4) are: ($) -12,000 -7,700 -6,900 -4,700 772 Determine the interest rate used in computing the project balance. Enter your answer as a percentage between 0 and 100."

Answer 1

Solution:

Assume that the interest rate used in computing the project balance is i.

The project balance of year 3 should be equal to Project balance of year 2 including accumulated interest plus ‘An’ for year 3

Therefore to calculate the interest rate used in computing the project balance, we have to set the following equation based on project balance of year 3 (For year 3, we know the value of ‘An’ which is 3,258)

Project balance of year 2 (1+i) + ‘An’ for year 3 = Project balance of year 3

OR -6,900 *(1+i) + 3,258 = - 4,700

OR (- 6,900 *1 - 6,900 * i) + 3,258 = -4,700

OR - 6,900 * i – 3,642 = -4,700

OR - 6,900 * i = -1058

OR i = -1058 / -6900 = 0.1533

OR i = 15.33%

Therefore the interest rate used in computing the project balance is 15.33%.