Question

A cutting-edge product of Continental Fan had the following net cash flow series during its first 5-year period on the market. Find all rate of return values between 0% and 100%.

Year	Net Cash Flow, $
0	-50,000
1	36,000
2	25,000
3	13,000
4	-2,000
5	10,000

The rate of return is ______%.

Answer 1

Calculate the rate of return of the following cash flows.

Year	0	1	2	3	4	5
Net Cash Flow, $	-50,000	36,000	25,000	13,000	-2,000	10,000

Calculating the rate of return using trial and error method

Let the rate of interest is 30%. Calculate PW at 30%.

PW = -50,000 + 36,000 (P/F, 30%, 1) + 25,000 (P/F, 30%, 2) + 13,000 (P/F, 30%, 3) – 2,000 (P/F, 30%, 4) + 10,000 (P/F, 30%, 5)

PW = -50,000 + 36,000 (0.76923) + 25,000 (0.59172) + 13,000 (0.45517) – 2,000 (0.35013) + 10,000 (0.26933) = 395.53

The PW is positive. Increase the rate of interest to get negative PW. Increase the rate of interest to 31% and calculate PW.

PW = -50,000 + 36,000 (P/F, 31%, 1) + 25,000 (P/F, 31%, 2) + 13,000 (P/F, 31%, 3) – 2,000 (P/F, 31%, 4) + 10,000 (P/F, 31%, 5)

PW = -50,000 + 36,000 (0.76335) + 25,000 (0.58271) + 13,000 (0.44482) – 2,000 (0.33955) + 10,000 (0.25920) = -256.09

Using interpolation

ROR = 30% + [395.53 – 0 ÷ 395.53 – (-256.09)] * 1%
ROR = 30.606%

The rate of return is 30.606%.