Reference no: EM13881841
Samara, an engineer working for GE, invested her bonus money each year in company stock. Her bonus has been $8000 each year for the past 6 years (i.e., at the end of years 1 to 6). At the end of year 7, she sold the stock for $52,000 to buy a condo; she purchased no stock that year. In years 8 to 10, she again invested the $8000 bonus. Samara sold all of the remaining stock for $28,000 immediately after the investment at the end of year 10.
(a) Determine the number of possible rate of return values in the net cash flows series using the two sign tests.
(b) Determine the external rate of return by hand, using the modified rate of return approach with an investment rate of 12% per year and a borrowing rate of 8%.
(c) Find the external rate of return by spreadsheet using the ROIC approach with an investment rate of 12% per year.
(d) Enter the cash flows into a spreadsheet, and use the IRR function to find the i * value. You should get the same value as the ROIC in part (c). Explain why this is so, given that the investment rate is 12% per year. ( Hint: Look carefully at the column labeled "Future worth, F, $" when you solved part (c) using the spreadsheet.)
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