Now consider an investment
Assume you invest $1000 over 4 years
The investment generates $315.47 per year
What interest rate equals the positive cash flows to the initial investment?
Solution:
We can state: 0 = -1000 + 315.47(P/A,i*,4)
and solve for i* to get i*=10%. So, 10%
So, 10% is the unique rate that will make the unrecovered investment balance to be zero at the end of the life. Then 10%
is the ROR.
and solve for