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problemset006answers - Answers to Problem Set 6 (7.5) What...

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Answers to Problem Set 6 (7.5) What rate of return per month will an entrepreneur make over a 2½-year project period if he invested $150,000 to produce portable 12-volt air compressors? His estimated monthly costs are $27,000 with income of $33,000 per month. Here we have to use “TRIAL AND ERROR” method along with INTERPOLATION. This is usually how this goes. STEP 1: WRITE DOWN THE EQUATION pw(i)=0 => -150,000 + (33,000-27,000)(P/A,i, 30) = 0 or -150,000 + (6,000)(P/A,i_12, 30) = 0 since we have 30 months in 2.5 years and i_12 denotes the monthly rate. STEP 2: GUESS Look in the tables to “guess the interest rate”, i.e., look for a value of the p/a factor that will make pw close to zero and read the corresponding i: (so we are look for something close to 150/6=25 for n=30) Let’s use the value 25.8077 which corresponds to i = 1%, then we get PW(.01)=4,846.2 We want to bring PW closer to zero and so we have to INCREASE THE RATE SINCE WE STARTED WITH POSITIVE PRESENT VALUE. The next rate is the table is 1.25% which has factor value 24.8889 and so gives PW(.0125)= -666.6. (Actually here we could have guessed from the start the the factor values we need are the two given above since they are the two closest of 25.) We have a “positive and a negative’ value from two `consecutive’ interest rates in the tables so we now stop and STEP 3: INTERPOLATE
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This note was uploaded on 09/24/2011 for the course CPS 125 taught by Professor Panzer during the Winter '11 term at Ryerson.

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problemset006answers - Answers to Problem Set 6 (7.5) What...

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