Question

The business plan for KnowIt, LLC, a start-up company that manufactures portable multigas detectors, showed equivalent annual cash flows of $400,000 for the first 5 years. If the cash flow in year 1 was $308,000 and the constant increase thereafter was $50,000 per year, what interest rate was used in the calculation?

The interest rate used in the calculation was ____%

Answer 1

Calculate the breakeven IRR for the two cash flows

CF1 = 400,000 - 308,000

CF2 = 400,000 - 308,000 - 50,000

CF3 = 400,000 - 308,000 - 50,000*2

CF4 = 400,000 - 308,000 - 50,000*3

CF5 = 400,000 - 308,000 - 50,000*4

Cash flows	Year
-	0
92,000.000	1
42,000.000	2
(8,000.000)	3
(58,000.000)	4
(108,000.000)	5

Use IRR function in Excel

interest rate used = 8.35%