Question

2. Consider the following cash flow. Year Cash Flow - 100 +50 نہ دیا و +40 +30 Determine by graphical method the rate of return on this cash flow. Try i = 2% and i = 10%.

Answer 1

In the graph NPV will be shown in the y axis and rate in the x axis. The rate of return will be that r at which NPV is 0.

We find NPV at i = 2% and get it as $14.43. At 10% NPV is -$4. Thus NPV is greater than 2% and less than 10%. We build a table and find the following:

i	NPV
2%	14.43
3%	11.80
4%	9.28
5%	6.85
6%	4.52
7%	2.27
8%	0.10
8.047%	0
9%	-        1.99
10%	-        4.00

Thus rate of return is 8.047%

Graph is shown below:

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