Question

# A person is considering an investment situation that requires the investment of \$150,000 at time zero...

A person is considering an investment situation that requires the investment of \$150,000 at time zero and \$200,000 at year one to generate profits of \$95,000 per year starting at year two and running through year 10 (a 9 year profit period) with projected salvage value of \$150,000 at the end of year 10. Determine the compound interest rate of return for these end of period funds. Draw the cumulative cash position diagram for the time zero through end of year 10 at the project rate of return.

 Calculation of compound Rate of Interest Years 1 2 3 4 5 6 7 8 9 10 Total a. Outflow 150000 200000 b. Inflow 95000 95000 95000 95000 95000 95000 95000 95000 95000 c. Net Inflow/(outflow) [a+b] -150000 -105000 95000 95000 95000 95000 95000 95000 95000 95000 d. IRR (Guess 27.47%) 0.7845 0.615438 0.48281 0.378763 0.297139 0.233105 0.182871 0.143462 0.112545 0.08829 e. PV [c*d] -117675 -64620.9 45866.93 35982.53 28228.23 22145 17372.72 13628.87 10691.82 8387.72 8.11 f. Cumulative Cash Position -150000 -255000 -160000 -65000 30000 125000 220000 315000 410000 505000 Answer (i) Compound Rate of Intrest = 27.47% Answer (ii) Cumulative charts are shown as follow:-

#### Earn Coins

Coins can be redeemed for fabulous gifts.