Homework Answers
| Answer: | ||||||||
| Calculation of eate of return used in building the annuity | ||||||||
| Formula = | Lower rate + | NPV at lower rate | x (Higher rate - Lower rate) | |||||
| NPV at lower rate - NPV at higher rate | ||||||||
| NPV = | Present value of Cash inflows - Initial cost | |||||||
| Initial cost = | 15900000.00 | |||||||
| Present value at lower rate = | 8% | Present value at higher rate = | 9% | |||||
| Year | Cash Inflows | Present value factor @ 8% | Present value of cash inflows | Year | Cash Inflows | Present value factor @ 9% | Present value of cash inflows | |
| 1 | 1700000.00 | 0.92593 | 1574074.07 | 1 | 1700000.00 | 0.91743 | 1559633.03 | |
| 2 | 1700000.00 | 0.85734 | 1457475.99 | 2 | 1700000.00 | 0.84168 | 1430855.99 | |
| 3 | 1700000.00 | 0.79383 | 1349514.81 | 3 | 1700000.00 | 0.77218 | 1312711.92 | |
| 4 | 1700000.00 | 0.73503 | 1249550.75 | 4 | 1700000.00 | 0.70843 | 1204322.86 | |
| 5 | 1700000.00 | 0.68058 | 1156991.43 | 5 | 1700000.00 | 0.64993 | 1104883.36 | |
| 6 | 1700000.00 | 0.63017 | 1071288.37 | 6 | 1700000.00 | 0.59627 | 1013654.46 | |
| 7 | 1700000.00 | 0.58349 | 991933.67 | 7 | 1700000.00 | 0.54703 | 929958.22 | |
| 8 | 1700000.00 | 0.54027 | 918457.10 | 8 | 1700000.00 | 0.50187 | 853172.68 | |
| 9 | 1700000.00 | 0.50025 | 850423.24 | 9 | 1700000.00 | 0.46043 | 782727.23 | |
| 10 | 1700000.00 | 0.46319 | 787428.93 | 10 | 1700000.00 | 0.42241 | 718098.37 | |
| 11 | 1700000.00 | 0.42888 | 729100.86 | 11 | 1700000.00 | 0.38753 | 658805.85 | |
| 12 | 1700000.00 | 0.39711 | 675093.39 | 12 | 1700000.00 | 0.35553 | 604409.03 | |
| 13 | 1700000.00 | 0.36770 | 625086.47 | 13 | 1700000.00 | 0.32618 | 554503.70 | |
| 14 | 1700000.00 | 0.34046 | 578783.77 | 14 | 1700000.00 | 0.29925 | 508718.99 | |
| 15 | 1700000.00 | 0.31524 | 535910.90 | 15 | 1700000.00 | 0.27454 | 466714.67 | |
| 16 | 1700000.00 | 0.29189 | 496213.79 | 16 | 1700000.00 | 0.25187 | 428178.60 | |
| 17 | 1700000.00 | 0.27027 | 459457.22 | 17 | 1700000.00 | 0.23107 | 392824.40 | |
| 18 | 1700000.00 | 0.25025 | 425423.35 | 18 | 1700000.00 | 0.21199 | 360389.36 | |
| 19 | 1700000.00 | 0.23171 | 393910.51 | 19 | 1700000.00 | 0.19449 | 330632.44 | |
| 20 | 1700000.00 | 0.21455 | 364731.95 | 20 | 1700000.00 | 0.17843 | 303332.51 | |
| Total | 16690850.59 | Total | 15518527.64 | |||||
| NPV at Lower rate | NPV at higher rate | |||||||
| Present vallue of cash inflows | 16690850.5927 | Present vallue of cash inflows | 15518527.6374 | |||||
| Less: Initial cost | 15900000.0000 | Less: Initial cost | 15900000.0000 | |||||
| NPV | 790850.5927 | NPV | -381472.3626 | |||||
| ROR | 8% + | 790850.5927 | x (9-08)% | |||||
| 1172322.9552 |
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