You need to determine i* per year for the cash flows shown below. Since you have a new boss, you decided to perform a thorough analysis. Do the following:

(a) Use a spreadsheet to find i*.

(b) Develop two charts on the spreadsheet: a column chart that plots cash flows versus year, and a scatter chart showing PW values versus a range of i values, one of which is i*. Use Figure 7€“4 as a guide.

(c) You were told when handed the estimates that the rate of return was about 25%. Determine the cash flows for years 2, 3, and 4 that are necessary to realize an i* of 25% per year, if they remain in the same proportion to each other as initially estimated.

Figure 7-4

Transcribed Image Text:

2 -80,000 3 Year Cash Flow, $ 70,000 9000 30,000 B н Cash flow, $ Trial i, % -200,000 Year PW value, S 15,000 15,000 15,000 5.0% 100,000 6.0% 77,920 57,859 4 7.0% 15,000 15,000 15,000 15,000 15,000 12.0% 4 8.0% 39,609 i* = 10.55% 9.0% 22,988 $120,000 7,831 -6,006 10.0% $100,000 $80,000 11.0% 10 -18,655 11 15,000 $60,000 12 10 315,000 $40,000 13 $20,000 14 Rate of Return 10.55% $0 15 -$20,000 16 5% 6% 7% 8% 9% 10% 11% 12% 17 18 Interest rate i, % 19 20 21 ш PW value. $