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If put into the market, uPhone Max will bring to your firm $10,000 revenue per quarter. uPhone Max will dominate the market for the next 2 years, before any competitors can catch up with your firm’s technology. Two years later, your R&D department will be able to upgrade the technology. Your firm will then terminate the uPhone Max and release a new model, uPhone Max Pro. You will sell the equipment of your uPhone Max to your competitor and recover $20,000 from the selling. Given your initial $40,000 investment to upgrade your equipment, what is the quarterly rate of return from your project? Do you think your firm should invest in the uPhone Max project? (Hint: the rate of return calculated by your calculator is the periodic rate, i.e. the quarterly rate of return.)

Time line:

Quarterly rate of return: N: PV: FV: I/Y: PMT: MODE: Invest or not:

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Answer #1

N = 8 (total number of quarters in 2 year period = 2 * 4 = 8)

PV = -40000 (initial investment)

FV = 20000 (recovery of investment after 2 years)

PMT = 10000 (quarterly cash flow)

MODE = END (each cash flow is received at the end of the quarter. Hence, it is an ordinary annuity)

CPT -->> I/Y

I/Y is calculated to be 22.21%

Quarterly rate of return is 22.21%

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