1. A small company purchased now for $27,208 will lose $867 each year for the first...

1. A small company purchased now for $27,208 will lose $867 each year for the first 4 years. An additional $6,082 invested in the company during the fourth year will result in a profit of $6,979 each year from the fifth to the fifteenth year. At the end of 15 years, the company can be sold for $32,446. Calculate the ERR when є = 13%.

Expert Solution


*Calculate the ERR when external reinvestment rate per period is 13%.*

Year	Cash Inflow (Amount in $)	Cash outflow (Amount in $)	Present value of cash outflow (Amount in $)	Future value of cash outflow (Amount in $)
0	-	27,208	27,208	-
1	-	867	767	-
2	-	867	679	-
3	-	867	601	-
4	-	6,949	4,262	-
5	6,979	-	-	23,691
6	6,979	-	-	20,965
7	6,979	-	-	18,553
8	6,979	-	-	16,419
9	6,979	-	-	14,530
10	6,979	-	-	12,858
11	6,979	-	-	11,379
12	6,979	-	-	10,070
13	6,979	-	-	8,911
14	6,979	-	-	7,886
15	39,425	-	-	39,425
			33,517	1,84,687

ERR = ($1,84,687/$33,517)1/15 - 1 = 12.05%

ekkarill92 answered 2 years ago

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