CalculatingRate of Return 207the equatiotl by trial and error. Tryi=5% first:
Ati = 5%,
EUAB- EUAC= 0
100 +75(AfG, 5%, 4)-700(Af P,5%, 4) = 0
100 + 75(1.439) -700(0.2820) = 0
EUAB - EUAC=208 -197 =+11
The EUAC is too low. If the interest rate is increased, EUAC will increase. Tryi=8%:
Ati =8%,
EUAB- EUAC= 0
100+75(AfG,8%,4)-700(Af P,8%,4) = 0
100 + 75(1.404) - 700(0.3019)= 0
EUAB- EUAC=205 - 211=-6
This time the EUAC is too large. We see that the true rate of return is between 5% and 8%. Try
i =7%:
Ati= 7%,
The IRR is 7%.
~EUAB- EUAC= 0
100 +75(AfG, 7%, 4)-700(Af P,7%, 4) = 0
100 + 75(1.416)- 700(0.2952)= 0
EUAB- EUAC- 206 - 206= 0
Calculate the rate of return on the investment on the following cash flow.
Year
o 1 2 3 4 5Cash Flow
-$100
+20
+30
+20
+40
+40
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