Question

A cutting-edge product of Continental Fan had the following net cash flow series during its first 5-year period on the market. Find all rate of return values between 0% and 100%.

Year	Net Cash Flow, $
0	-44,000
1	33,000
2	24,000
3	13,000
4	-5,000
5	7,000

The rate of return is ? %.

Answer 1

Calculating Rate of Return by using Trial and Error Method

Let interest rate is 30%

Calculate PW of the cash flows at 30%

PW at 30% = -44000 + 33000 (1+.30) ^-1 + 24000 (1+.30) ^-2 + 13000 (1+.30) ^-3

– 5000 (1+.30) ^-4 + 7000 (1+.30) ^-5 = 1638

As the Present Value is positive, increase the rate of interest to get negative NPW.

Calculate NPW at 33%

PW at 33% = -44000 + 33000 (1+.33) ^-1 + 24000 (1+.33) ^-2 + 13000 (1+.33) ^-3

– 5000 (1+.33) ^-4 + 7000 (1+.33) ^-5 = -10

Now use the interpolation formula to calculate rate of return.

ROR = 30% + [1638 – 0 ÷ 1638 – (-10)]*3%

ROR = 32.97% or 33%

Rate of return is 32.97%