Question

An indium-gallium-arsenide-nitrogen alloy developed at Sandia National Laboratory is said to have potential uses in electricity-generating solar cells. The new material is expected to have a longer life, and it is believed to have a 40% efficiency rate, which is nearly twice that of standard silicon solar cells. The useful life of a telecommunications satellite could be extended from 10 to 15 years by using the new solar cells. What rate of return could be realized if an extra investment now of $860,000 would result in extra revenues of $450,000 in year 11, $500,000 in year 12, and amounts increasing by $50,000 per year through year 15?

The rate of return that could be realized was_______%.

Answer 1

The present worth of the project must be equal to zero. It can be written mathematically as follows

Now we can determine the rate of return through trial and error method. Let us assume rate of return is 10%

PW = $ 789,909

Here the present worth is less than the investment thus decreasing the rate of return

Let us assume it to be 9%

PW = $ 889,596

Now the PW is greater than the investment thus the required rate lies in between 9 to 10%. We can determine it using linear interpolation technique

Thus, the rate of return that could be realized = 9.30%

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