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# Determine the rate of return of the following cash flow using the ERR.docx

Determine the rate of return of the following cash flow using the ERR method and the
reinvestment rate of 4% per year.
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
.

Determine the rate of return of the following cash flow using the ERR method and the
reinvestment rate of 4% per year.
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
.

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