1.
Determine the rate of return of the following cash flow using the ERR method and the
reinvestment rate of 4% per year.
Year Expense, $ Revenue, $ Year Expense, $ Revenue, $
0 140,000 - 6 32,000 82,000
1 32,000 47,000 7 32,000 89,000
2 32,000 54,000 8 32,000 96,000
3 32,000 61,000 9 32,000 103,000
4 32,000 68,000 10 32,000 110,000
5 32,000 75,000 11 32,000 117,000
Solution
Year Expense(A) Revenue(B) Income(B-A) No of Years of reinvestment(N) FV of Reinvested
Amount=Income(1.04)^N 0 140,000 Â Â Â Â Â Â Â Â Â - -140,000 1 32,000 47,000 15,000
10 22203.66 2 32,000 54,000 22,000 9 31312.86 3 32,000 61,000 29,000 8 39688.50 4 32,000
68,000 36,000 7 47373.54 5 32,000 75,000 43,000 6 54408.72 6 32,000 82,000 50,000 5
60832.65 7 32,000 89,000 57,000 4 66681.94 8 32,000 96,000 64,000 3 71991.30 9 32,000
103,000 71,000 2 76793.60 10 32,000 110,000 78,000 1 81120.00 11 32,000 117,000 85,000 0
85000.00 Total 637406.77 140000*(1+ERR)^11=637406.77 or (1+ERR)^11=637406.77/140000
4.55 1+ERR=(4.55)^(1/11) 1.1477 ERR=(1.1477-1)*100 14.77