This interpolation gives i = 2.42 percent per semiannual period, or 4.84 percent per an-
num compounded semiannually.
INVESTMENT-RATE CALCULATION AS
ALTERNATIVE TO ANNUAL-COST
CALCULATION
In the Comparison of Equipment Cost and Income Generated procedure in this section, it
was concluded that the proposed investment in labor-saving equipment could not be justi-
fied because it failed to yield the minimum acceptable rate of 8 percent. Determine the ac-
tual rate of return for this investment.
Calculation Procedure:
- Compute the net annual dividend
Labor saving $4000
Rental income 1000
Total $5000
Less maintenance 600
Net dividend $4400- Select a trial interest rate
Using an interest rate of 5 percent, determine the present worth of the dividends and the
equipment salvage value. Thus, (net dividend, S)(USPW) + (salvage value, S)(SPPW), for
/ = 5 percent, n = 7 years. Or, $4400(5.786) + $5000(0.7107) = $29,012. Since the invest-
ment was $30,000, the actual interest rate is smaller. - Test another trial interest rate
Using a 4 percent interest rate and repeating the calculation in step 2, we get $4400
(6.002) + $5000(0.7599) = $30,208. - Interpolate linearly to obtain the actual interest rate
Linear interpolation yields a rate of i = 4.2 percent. This verifies that the earlier results
were valid.
ALLOCATION OF INVESTMENT CAPITAL
In devising a program for investment of $8000 in surplus funds, a firm has a choice be-
tween two plans. Each plan pays an annual dividend and repayment of the invested capi-
tal when the venture terminates. Under plan A the dividend varies with the sum invested
in the manner shown below. Under plan B the dividend rate is 10 percent, irrespective of
the sum invested. In what manner should this firm divide its investment capital to secure
the maximum return?