Question

What rate of return per month will an entrepreneur make over a 2.5 year project period if he invested $150,000 to produce portable 12 volt air compressor? His monthly costs are $25,000 and his revenues are $33,000.

Answer 1

Number of months = 2.5 x 12 = 30

Monthly net income ($) = Revenue - Cost = 33,000 - 25,000 = 8,000

If required rate of return be R% per month, then

$8,000 x PVIFA(R%, 30) = $150,000

PVIFA(R%, 30) = $150,000 / $8,000 = 18.7500

From PVIFA Factor table, PVIFA(3%, 30) = 19.6004 and PVIFA(4%, 30) = 17.2920

Since R must lie in between these two values, using Interpolation,

(R - 3) / (4 - 3) = (18.75 - 19.6004) / (17.2920 - 19.6004)

R - 3 = (- 0.8504) / (- 2.3084)

R - 3 = 0.3684

R = 3.3684

R ~ 3.37%