Question

In: Economics

Chemco Enterprises is the manufacturer of Ultra-Dry, a hydrophobic coating that will waterproof anything. Over a...

Chemco Enterprises is the manufacturer of Ultra-Dry, a hydrophobic coating that will waterproof anything. Over a 5-year period, the costs associated with the pilot test product line were as follows: first cost of $33,000 and annual costs of $18,000. Annual revenue was $30,000 and used equipment was salvaged for $4,000. What rate of return did the company make on this product?

The rate of return the company made on the product is _____%.

Solutions

Expert Solution

Using Excel's IRR formula

First cost = -33000

Cash flow from year 1 to year 4 = (30000-18000) = 12000

Cash flow in year 5 = 12000+4000 = 16000

Formula-

Year Cash flow
0 -33000
1 12000
2 12000
3 12000
4 12000
5 16000
=IRR(B2:B7)
Year Cash flow
0 -33000
1 12000
2 12000
3 12000
4 12000
5 16000
25.8%

Rate = 25.83% or 26%


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