Question

Question 1

"Consider the project balances for a typical investment project with a service life of four years.
The 'An' for years 0 through 4 are: ($)
-12,000
--
--
3,280
--
The symbol '--' represents missing numbers, not 0.
The project balance at the end of the given years (n = 0 through 4) are: ($)
-12,000
-8,100
-6,800
-4,700
376
Determine the interest rate used in computing the project balance. Enter your answer as a percentage between 0 and 100."

Answer 1

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 3,280)

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

OR -6,800 *(1+i) + 3,280 = - 4,700

OR (- 6,800 *1 - 6,800 * i) + 3,280 = -4,700

OR - 6,800 * i – 3,520 = -4,700

OR - 6,800 * i = -1180

OR i = -1180/-6,800 = 0.1735

OR i = 17.35%

Therefore the interest rate used in computing the project balance is 17.35%.