Question 8.P.6: Solve Problem 8.5 by trial and error, using (8.2). NPV = -|C......

Try i = 15%

NPV = -$50 000 + $16719(P/A, 15%, 5) = -$50 000 + $16719(0.29832)^{-1} = +$6043.85

The given cash flows are such as to make the NPV monotonically decreasing in i ; hence i * , the value at which the NPV vanishes, must be greater than 15%.

Try i = 25%

NPV = -$50 000 + $16 719(P/A, 25%, 5) = -$50 000 + $16 719(0.37185)^{-1} = -$5038.32

Since the NPV now is negative, it must be that 15% < i* < 25%. Try a rate that is halfway between these two rates:

Try i = 20%

NPV = -$50 000 + $16 719(P/A, 20%, 5) = -$50 000 + $16 719(0.33438)^{-1} = $0

Hence, i * = 20%.