Problem 02049Calculation of unknown interest rate An AE firm

Problem 02.049-Calculation of unknown interest rate An A&E; firm planning for a future expansion deposited $36,000 each year for 5 years into a sinking (investment) fund that was to pay an unknown rate of return. If the account had a total of $454.000 immedlately after the fifth deposit, what rate of return did the company make on these deposits? The rate of return that the company made was [ ] 96.

Solution

First, calculate future value of deposited cash flow series.

FV = 36000(1+r)^5-1 + ... +36000(1+r)^5-5

454000 = 36000 {(1+r)⁴ + ... 1)}

Using hit and trial method, use different values of r from 5-50%

This gives best fit value of r = 47.5%

Thus rate of return made by company is 47.5%