EXPERT ANSWER
5) IN ORDER TO FIND THE EQUIVALENT ANNUAL WORTH WE WILL USE THIS FORMULA:
P = R * PV / ( 1 – ( 1 + R) ^ – N )
AND BEFORE THAT WE WOULD NEED TO FIND THE PRESENT VALUE .
INITIAL INVESTMENT = $7,500
ANNUAL CASH FLOW RECIEVED = $2,000
PV = -7,500 + 2,000 (P/A,I,N)
WHERE I = 9%
AND N = 6
PV = -7,500 + 2,000(P/A,9%,6)
PV = -7,500 + 2,000 * 4.486
PV = -7,500 + 8,972
PV = $1,472
NOW FOR FINDING THE EUAW WE WILL USE THE FORMULA:
P = R * PV / ( 1- ( 1+R) ^ – N)
P = 9% * 1,472 / ( 1 – ( 1 + 9% ) ^ -6)
P = 132.48 / ( 1 – (1.09) ^ -6 )
P = 132.48 / ( 1 – 0.5962)
P = 132.48 / 0.4037
P = $328.13 (APPROX)
AND HENCE THE CORRECT OPTION IS A.
6) IN ORDER TO FIND THE RATE OF RETURN , WE WILL HAVE TO EQUATE THE PV TO ZERO OF THE CASH FLOWS.
PV = -14,000 + 5,000(P/A,I,N) + 5,500(P/A,I,N) + 6,000(P/A,I,N) + 6,500(P/A,I,N)
0 = -14,000 + 5,000(P/A,I,1) + 5,500(P/A,I,2) + 6,000(P/A,I,3) + 6,500(P/A,I,4)
14,000 = 5,000(P/A,I,1) + 5,500(P/A,I,2) + 6,000(P/A,I,3) + 6,500(P/A,I,4)
NOW, WE SOLVE FOR VARIOUS VALUES OF I , BY TRIAL AND WE GET I = 22.12% OR 22% APPROX.