Your company made investments in two product lines in the past. You have been as

Question

Your company made investments in two product lines in the past. You have been asked to evaluate the rate of return on these investments. Assume a monthly accounting period for both. investment A: The company made an initial investment of $1.2 million to develop a new product. After two years, they sold the product line to another company for $6.6 million. investment B: The company made an initial investment of $1.5 million. After a one year startup period, the company received a monthly revenue stream of $250,000 from product sales for the next two years. Calculate the company's rate of return on these two investments by doing the following: For investment A, create a cash flow diagram showing the investment amount (negative) and the lump sum payment from its sale to another company (positive). Use a monthly accounting period. Determine the monthly rate of return of the investment by equating the investment amount to the present worth of the sale of the product line. Use the engineering economics formulas to write a mathematical expression for this, using the symbol i for the unknown monthly rate of return (the only unknown in the final equation). Then solve for i and report both the monthly and the annual rate of return (in %). For investment B, create a cash flow diagram showing the investment amount (negative) and the monthly revenue stream to the company (positive). Use a monthly accounting period. Determine the monthly rate of return of the investment by equating the investment amount to the present worth of the revenue stream received. Use the engineering economics formulas to write a mathematical expression for this, using the symbol i for the unknown monthly rate of return. Then use the Excel Goal Seek function to find i, and copy and paste an image of your spreadsheet window into your submission. Report the both the monthly and the annual rate of return (in %) in your

Explanation / Answer

a) Cash flow diagram is nothing but showing cash flow through out years
Here :
At year 0= =-1.2mn
At year 1=0
At Year 2=6.6mn

b)let i be interest rate and since it is is given monthly then

1.2mn=6.6mn/(1+i/12)^2*12
i(monthly means i/12)=7.36%
i (annual)=7.36%*12=88.34%

c)
Cash flow diagram is nothing but showing cash flow through out years
Here :
At year 0= =-1.5mn
At year 1=250,000 every month (It is received individually for 12 months)
At Year 2=250,000 every month(It is received individually for 12 months)

d)
let i be interest rate and since it is is given monthly then
use pv formuale in excel

1.5mn=pv(rate,nper,pmt,fv,type)
1.5mn=pv(i/12,2*12,250000,,0)
i(monthly means i/12)=16.21%
i (annual)=16.21%*12=194.57%

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