Question
In: Economics
If P = -$500,000, Annual Income = +$10,000 per year, Salvage= +$700,000, and N = 10...
If P = -$500,000, Annual Income = +$10,000 per year, Salvage= +$700,000, and N = 10 years. Determine the Interest Rate
Solutions
Expert Solution
Ans) Here interest is internal rate of return, which the interest rate at which the present value of cash inflow will equal to cash outflo
- 500000 =10000 PVIFA(r,10) +700000 PVIF(r,10)
Where PVIFA = Present value interest factor for annuity
PVIF = Present value interest factor.
r = rate of interest
n= 10 years given
P = - 500000 = initial investment
0 = - 500000 + 10000 PVIFA ( r, 10) +700000 PVIF(r,10) ------- this is the equation for Internal rate of return. By looking through the present value interest factor annuity and present value interest factor table through it and trial method we take rate of interest as 5 %
Hence the irr equation will give the below result
0 = - 500000 + 10000 PVIFA( 5%, 10)+700000 PVIF (5 %, 10 )
0 = -500000 + 10000*7.272+ 700000*0.613
= -500000 +72720+ 429100 = 1820
Which is closest approximation figure to above
Hence internal rate of return is approximately 5 %
Rahul Sunny answered 7 months agoRelated Solutions
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Year P index &n
Year
P
index
nominal GDP
1
88
50
2
96
52
3
100
52
4
100
47
5
98
47
6
99
48
7
100
52
8
105
58
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