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What rate of return did a company make on a new product line over a five-year...

What rate of return did a company make on a new product line over a five-year period, if the initial development cost was $282,092, the annual costs were $202,078, the annual revenue was $256,260 per year, and the company sold the used equipment as for $123,526 at the end of year five?

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Answer #1

Let rate of return be i

At i, present worth should be equal to zero, so

PW = -282092 + (256260-202078) *(P/A, i%, 5) + 123526*(P/F,i%,5)

-282092 + 54182 *(P/A, i%, 5) + 123526*(P/F,i%,5) = 0

54182 *(P/A, i%, 5) + 123526*(P/F,i%,5) = 282092

USing trail and error method

At i = 8%, value of expression [54182 *(P/A, i%, 5) + 123526*(P/F,i%,5) ] = 300402.735

At i = 9%, value of expression [54182 *(P/A, i%, 5) + 123526*(P/F,i%,5) ] = 291032.509

At i = 10%, value of expression [54182 *(P/A, i%, 5) + 123526*(P/F,i%,5) ] = 282092.336

At i =10% value of expression is equal to value required, so

Rate of return = 10%

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