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In: Economics

an investor paid $100,000 at time zero for a project to generate $40,000 per year for...

an investor paid $100,000 at time zero for a project to generate $40,000 per year for next 5 years with zero salvage value at the end of year 5 , calculate ROR and draw cumulative cash flow diagram

Solutions

Expert Solution

We are given the following information

PMT $            40,000.00
n 5
PV $ 1,00,000.00

We need to solve the following equation to arrive at the required PV

Therefore the rate of return achieved is 28.65%

Below is the data for the diagram:

Year Opening Balance CF Cumulative CF
1 -$1,00,000.00 $40,000.00 -$60,000.00
2 -$60,000.00 $40,000.00 -$20000.00
3 -$20,000.00 $40,000.00 $20,000.00
4 $20,000.00 $40,000.00 $60,000.00
5 $60,000.00 $40,000.00 $100000.00

Basically, Original investment was negative, and the CF in year 1 recovered 40% of the same. 60% was carried forward to the next year, of which 40000 was recovered and -20000 was carried forward to the next year, where the CF was greater so finally there was a positive Cumulative CF of 20000 and the following CFs are added each year to finally have the cumulative CF of 100000

Otherwise if the normal CF were to be plotted then the CF diagram would simply plot the CF of each year and the chart would look as follows:

Rahul Sunny answered 4 months ago
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