ECE 333 Green Electric Energy

Quiz 4 Solution
Tuesday, October 15, 2013 during class

Problem 1. [5 points] Determine the IRR (0< IRR <1) in the cash flow set illustrated below
$ 800

0 1
2
$ 200
$ 300
Solution:
NPV 300 200 1 800 2
4 3 2 1 0

1

1 IRR
Since is in the range of [0,1], the solution is

3 1
IRR
4 3

Problem 2. [20 points] Consider an investment that returns

$ 3,000 at the e.o.y. 1
$ 1,000 at the e.o.y. 2
$ 4,000 at the e.o.y. 4
i = 5%
(i) Evaluate the present value P
(ii) Suppose this investments requires $ 7000 now, determine the NPV
(iii) If we borrow 7,000-dollar, 10-year, 10-% loan from bank and pay back to the
bank with equal payment cash flow set during this 10-year period, compute how
much we need to pay per year without considering the inflation rate
 (iv) Repeat (iii), if the inflation rate is 3% ( equal payment cash flow set is measured
in terms of inflated cash )

Solution:
(i)
1 1

1 d 1 0.05
P 3, 000 1 1, 000 2 4, 000 4
7, 054$

(ii)

NPV 7,054 7,000 54$

(iii)
1 1
bank : 1 d 1 0.1

CRF (1 ) 6.1445
10

Thus the annual payment is

7, 000
A 1139$
CRF

(iv) I drop this part because I should have stated the assumption that the 10% interest
rate does not include inflation rate

1 1
bank :
1 d 1 0.1

bank : d (1 d )(1 e ) 1 0.133

1 1
1 d 1 0.133

CRF (1 ) 5.36
10

Thus the annual payment is

7, 000
A 1, 305$
CRF