return ing invest 712 Compute the rate of return on the foll

return. ing invest 7-12 Compute the rate of return on the followi ment. Year Cash Flow $10,000 0 3,000 3,000 3,000 3,000 0 4 ng cas

Solution

Year

Cash Flows ($)

0

-10,000

1

0

2

3,000

3

3,000

4

3,000

5

3,000

Use the trial and error method.

Let the i = 5%

NPW at 5%

NPW = -10,000 + 0 + 3,000 (P/A, 5%, 4) (P/F, 5%, 1)

NPW = -10,000 + 0 + 3,000 (3.5460) (0.9524)

NPW = 132

As the NPW is positive at 5%, increase the interest rate to get negative NPW.

Calculate NPW at 6%

NPW at 6%

NPW = -10,000 + 0 + 3,000 (P/A, 6%, 4) (P/F, 6%, 1)

NPW = -10,000 + 0 + 3,000 (3.4651) (0. 0.9434)

NPW = -193

Using interpolation

IRR = 5% + [132 – 0 ÷ 132 – (-193)]*1%

IRR = 5.40%

Year	Cash Flows ($)
0	-10,000
1	0
2	3,000
3	3,000
4	3,000
5	3,000