Consider a project with an initial investment of $30,000, annual revenues of $7000 for the six-year useful life, a salvage value
of $5,000, and a planned overhaul cost of $12,000 at the end of the third year. Evaluate the project using both IRR and ERR.
1 answer:
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Answer:
2.32%
Explanation:
The formula for bond equivalent yield is in the attachment, we use it with the values provided in this question.
First, use the discount yield to calculate the price (P) of the bond
Face value = $1,000,000
Discount yield = 2.29 or 0.0229 as a decimal
Discount yield = [ (FV - P)/P ] *(360/T)
0.0229 =[ (1,000,000 -P)/P ] *360/69
0.0229P = (1,000,000 -P )5.2174
0.0229P + 5.2174P = 5,217,391.30
Price; P = $995,628.3618
Next, plug in the numbers in the bond equivalent yield (BEY) formula;
BEY = [ (1,000,000 - 995,628.3618)/$995,628.3618 ] * 365/69
BEY = 0.02323 OR 2.32%
