Answer:
The interest rate is i = 53.82%
Explanation:
Initail cost = 18.000
Salvage value = 0
Life = 5 years
Annual revenue = 28000
Annual cost = 6000
Net revenue = 28000 - 6000 = 22000
Tax rate = 40%
Depreciation per year = (Purchase value - Salvage value ) / life = 18000 / 5 = 3600
Taxable income = Net cash flow - Depreciation = 22000 - 3600 = 18400
Tax = Tax rate * Taxable income = 0.4 * 18400 = 7360
ATCF = Taxable income - Tax + Depreciation = 18400 - 7360 + 3600 = 10960
Let IRR be i%, then,
-18000 + 10960 * (P/A, i%, 5) = 0
(P/A, i%, 5) = 18000 / 10960 = 1.642336
Using trail and error method
When i = 50% , value of (P/A, i%, 5) = 1.736626
When i = 51% , value of (P/A, i%, 5) = 1.711012
When i = 53% , value of (P/A, i%, 5) = 1.661749
When i = 54% , value of (P/A, i%, 5) = 1.638054
Using interpolation
i = 53% + (1.661749 - 1.642336) / (1.661749 - 1.638054) *(54% - 53%)
i = 53% + 0.819%
i = 53.82%
