Question

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.

Answer 1

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:-