Question

2.53 A small company that specializes in pow- der coating expanded its building and pur- chased a new oven that is large enough to handle automobile frames. The building and oven cost $125,000, but new business from hot-rodders has increased annual in- come by $520,000. If operating expenses for gas, materials, labor, etc., amount to $470,000 per year, what rate of return will be made on the investment if only the cash flows that occur over the next 4 years are included in the calculation?

Answer 1

initial cost=125000

annual income for four years=520000-470000=50000

assume rate of return is r

125000=50000/(1+r)^1+50000/(1+r)^2+50000/(1+r)^3+50000/(1+r)^4

use trial and error method to find r

after trying, we get r=21.86% (answer)

the above will be answer..