Question

year cash flow

0 -15000

1 +12000

2 +6000

3 -8000

4 +4000

5 +12000

use descartes and norstrom rules to define the characteristic of internal rate of return this investment

according to Descartes rules

according to Norstrom criteria

B) find external rate of return of the investment opportunity if the external investment %10

Answer 1

	year	cash flow	Cumulative cash Flow
	0	-15000	-15000
	1	12000	-3000
	2	6000	3000
	3	-8000	-5000
	4	4000	-1000
	5	12000	11000
	Number of sign changes	3	3
	According toDescarte's Rule,number of internal rate of return values isalways less than or equal to number of sign changes
	in the cash flow sequence
	In this case there are three sign changes in cash flow sequence.Hence there can be three real positive values of InternalRate of Return
	Norstrom's Rule is about sign changes in cumulative cash flow
	According to Norstrom's Rule,there is only one internal rate of return value if cumulative cash flow that starts with negative and changes sign only once
	In this case there are three sign changes in Cumulative cash flow sequence.HenceNorsstrom's rule is INCONLUSIVE
	EXTERNAL   RATE OF RETURN
			Extenal Invetment Rate=10%=0.1
				Future Value of Cash Flow=		(Cash flow)*(1.1^(5-N))
			N= Year of Cash flow
	N	A	B
	year	cash flow	Future Value
	1	12000	17569
	2	6000	7986
	3	-8000	-9680
	4	4000	4400
	5	12000	12000
		SUM	32275
				External Rate of Return=R
				15000*((1+R)^5)=32275
				(1+R)^5=32275/15000=	2.15168
				1+R=(2.15168^(1/5)=	1.165616
				R=	0.165616
				External Rate Of Return =	0.165616
				External Rate Of Return in percentage	16.56%