Question

24. Both you and your older brother would like to have $28,500 in 14 in years. Because of your success in this class, you feel that you are a more savvy investor than your brother and will be able to earn an annual return of 10.5 percent compared to your brother's 8.7 percent. How much less than your brother will you have to deposit today?

25. A project with an initial cost of $64,820 is expected to generate annual cash flows of $15,810 for the next 7 years. What is the project's internal rate of return?

Answer 1

24.Myself:

Information provided:

Future value= $28,500

Time= 14 years                    

Interest rate= 10.5%

The question is solved by calculating the present value.

Enter the below in a financial calculator to compute the present value:

FV= 28,500

N= 14

I/Y= 10.5

Press the CPT key and PV to compute the present value.

The value obtained is 7,043.25.

Therefore, I would have to deposit $7,043.25 today.

Brother:

Information provided:

Future value= $28,500

Time= 14 years                    

Interest rate= 8.7%

Enter the below in a financial calculator to compute the present value:

FV= 28,500

N= 14

I/Y= 8.7

Press the CPT key and PV to compute the present value.

The value obtained is 8,864.03

Therefore, my brother would have to deposit $8,864.03 today.

$8,864.03 - $7,043.25= $1,820.78

Hence, I would have to deposit $1,820.78 less today.

25. Internal rate of return is calculated using a financial calculator by inputting the below:

• Press the CF button.
• CF0= -$64,820. It is entered with a negative sign since it is a cash outflow.
• Cash flow for each year should be entered.
• Press Enter and down arrow after inputting each cash flow.
• After entering the last cash flow cash flow, press the IRR and CPT button to get the IRR of the project.

The IRR of project is 15.49%.

In case of any query, kindly comment on the solution