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%

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