This preview shows pages 1–2. Sign up to view the full content.

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

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
This is the end of the preview. Sign up to access the rest of the document.