Question

Third State Bank wants to add a new branch office. It has determined that the cost of construction of the new facility will be $1.5 million with another $500,000 in organizational costs. The bank has estimated that it will generate $319,522 per year in net revenues. If the new branch is expected to last 20 years, what is the expected rate or return on this investment? (Round to the nearest whole percent)

a. 6 percent
b. 21 percent
c. 15 percent
d. 32 percent
e. 25 percent
Can you provide a step-by-step process and the functions to solve this problem on a financial calculator

Answer 1

c. 15 percent

Step-by-step explanation:

From this scenario, we have the following information:

Total investment (cash outflow) = $1,500,000 + $500,000 = $2,000,000

The cash inflow in every of 20 years is $319,522

In excel, the formula is Rate(20,-$2000000,$319522) = 15%

If we do calculation manually, we have to solve this equation:

$2,000,000 = $319,522/(1+r)^1 + $319,522/(1+r)^2+.....+ $319,522/(1+r)^20

in which r is expected rate of return.

You can see both 2 calculation in excel attached