Question

"Consider the project balances for a typical investment project with a service life of four years.
The 'An' for years 0 through 4 are: ($)
-11,000
--
--
1,501
--
The symbol '--' represents missing numbers, not 0.
The project balance at the end of the given years (n = 0 through 4) are: ($)
-11,000
-8,800
-5,000
-3,700
719
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.

To calculate the interest rate used in computing the project balance, we have to set following equation based on project balance of year 3 (As for year 3 we know the value of ‘An’ which is 1,501)

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

OR -5,000 *(1+i) + 1,501 = -3,700

OR (- 5,000 *1 - 5,000 * i) + 1,501 = -3,700

OR - 5,000 * i – 3,499 = -3,700

OR - 5,000 * i = -201

OR i = -201/-5,000 = 0.0402

OR i = 4.02%

Therefore the interest rate used in computing the project balance is 4.02%.