A company that makes clutch disks for race cars has the annual net cash flows shown for one department.

What will be an ideal response?


(a) Descartes’ rule of signs: 2 sign changes; up to two i* values
Norstrom’s criterion: series starts negative; 1 sign change; one positive root
(b) 0 = -65 + 30(P/F,i*,1) + 84(P/F,i*,2) – 10(P/F,i*,3) – 12(P/F,i*,4)
Solve for i* by trial and error or spreadsheet
i* = 28.6% per year (spreadsheet)
A negative root of -56.0% is discarded. It can be displayed using = IRR(B1:B5,-50%)

(c) Apply net-investment procedure steps because the investment rate i i = 15% is not
equal to i* rate of 28.6% per year.

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