Answer:
The rate of return did the company make on this product is 61.93%
Explanation:
initial cost = 20000
Annual benefit = 29000
Annual cost = 16000
Salvage value = 10000
t = 5yrs
Let rate of return is I, then at rate of return NPV=0
Present value = -20000 + (29000 - 16000)*(P/A, i, 5) + 10000 (P/F, i, 5)
-20000 + 13000*(P/A, i, 5) + 10000 (P/F, i, 5) = 0
13*(P/A, i, 5) + 10* (P/F, i, 5) = 20
We need to use trail and error method to find rate of return
At = 10%, value of expression 13*(P/A, i, 5) + 10* (P/F, i, 5) is 55.49
At = 15%, value of expression 13*(P/A, i, 5) + 10* (P/F, i, 5) is 48.55
At = 25%, value of expression 13*(P/A, i, 5) + 10* (P/F, i, 5) is 38.24
At = 35%, value of expression 13*(P/A, i, 5) + 10* (P/F, i, 5) is 31.09
At = 45%, value of expression 13*(P/A, i, 5) + 10* (P/F, i, 5) is 25.94
At = 55%, value of expression 13*(P/A, i, 5) + 10* (P/F, i, 5) is 22.11
At = 60%, value of expression 13*(P/A, i, 5) + 10* (P/F, i, 5) is 20.55
At = 62%, value of expression 13*(P/A, i, 5) + 10* (P/F, i, 5) is 19.98
using interpolation
rate of return = 0.6 + (20.55-20)/(20.55-19.98) * (0.62-0.6)
= 0.6+0.019298
= 0.6193
= 61.93%
Therefore, The rate of return did the company make on this product is 61.93%
