Use factors and a spreadsheet to determine the interest rate per period from the following equation: 0 = ?40,000 + 8000(P?A,i*,5) + 8000(P?F,i*,8)
What will be an ideal response?
Interpolation:
Try 5%: - 40,000 + 8000(4.3295) + 8000(0.6768) = $50.40 > 0 too low
Try 6%: - 40,000 + 8000(4.2124) + 8000(0.6274) = $-1281.60 < 0 too high
Interpolation yields i* = 5.04% per period
Spreadsheet: Must use IRR function; enter cash flows into cells B1:B9.
Function: = IRR(B1:B9) displays i* = 5.04%
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