Question

The yearly cash flow estimates of an investment are shown in the table. a) Use the...

The yearly cash flow estimates of an investment are shown in the table.

a) Use the linear interpolation to derive the rate of return of this investment (initial guess = 15%).

Year 0 1 2 3
Cash flow, $ -80,000 9,000 70,000 30,000

b) If MARR = 20%, is this investment acceptable?

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Homework Answers

Answer #1

Let IRR be i%,then

-80000 + 9000*(P/F,i%,1) + 70000*(P/F,i%,2) + 30000*(P/F,i%,3) = 0

Dividing by 10000

0.9*(P/F,i%,1) + 7*(P/F,i%,2) + 3*(P/F,i%,3) = 8

using trail and error method

When i = 15%, value of 0.9*(P/F,i%,1) + 7*(P/F,i%,2) + 3*(P/F,i%,3) = 0.9*0.869565 + 7*0.756144 + 3*0.657516 = 8.048165

When i = 16%, value of 0.9*(P/F,i%,1) + 7*(P/F,i%,2) + 3*(P/F,i%,3) = 0.9*0.862069 + 7*0.743163 + 3*0.640658 = 7.899976

using interpolation

i = 15% + (8.048165-8) /(8.048165-7.899976)*(16%-15%)

i = 15% + 0.32% = 15.32%

b.

As IRR < MARR, investment is not justified

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