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October 25, 2014

October 25, 2014

Posted by **Juliette** on Wednesday, July 27, 2011 at 10:00pm.

- Finance -
**La Shawn**, Sunday, August 4, 2013 at 9:27pmAssemble the assumptions in an orderly manner:

Assumption 1: initial cost of the investment = $60,000.

Assumption 2a: estimated annual net cash inflow the investment will generate = $30,000.

Assumption 2b: estimated annual net cash inflow the investment will generate after taxes =

$15,000 (e.g. 30,000 less 50% tax rate equals 15,000 net).

Assumption 3: useful life of the asset = 10 years.

Perform calculation

Step 1. Divide the initial cost of the investment ($15,000) by the estimated annual net cash

inflow after taxes it will generate ($15,000). The answer is a ratio amounting to 4.000.

Step 2. Now use the abbreviated look-up table for the Present Value of an Annuity of $1,

which is found at the back of the Examples and Exercises section. Find the line item for the

number of periods that matches the useful life of the asset (10 years in this case).

Step 3. Look across the 10 year line on the table and find the column that approximates the

ratio of 4.000 (as computed in Step 1). That column contains the interest rate representing the

rate of return. In this case the rate of return is 20%.

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