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We need to find the accumulated profit at $t=5$ ( in years ) for the following project given that it is financed by a loan subject to interest $6.25\%$.

Project : Initial outlay of $\$ 100,000$ , proceeds at the end of each of the next 3 years $\$38,850$.

Proceeding as follows : At $t=1$ : Interest = $6250$ , Income = $38,850$.

So after paying the interest and from the remaining income paying the loan , we have amount left $67,400$.

Proceeding at the similar manner at $t=3$ , the amount left over is $4039.8$.

Now for acc. profit , in the solution , this amount $4039.8$ is accumulated to $t=5$ using the interest rate $6.25\%$ , but that was the interest on the loan , interest provided on the investments isn't given. So how can we apply $6.25\%$ ?

No further info is provided , whether it's a flexible borrowing etc etc. Can anyone help ?

User9523
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  • Where diid you find this problem? – alexjo Mar 31 '16 at 22:29
  • A fiend of mine asked this. According to me to find the acc. value at t = 5 , interest applicable on investments is required , but no such info was given in the question. @alexjo – User9523 Apr 01 '16 at 08:55
  • I've found this document on the web. At pag 5 you have your problem and at page 8 the solution. At any rate some information are missing but you can assume them from the solution. – alexjo Apr 01 '16 at 10:33
  • Maybe they should've added this statement - " Capital is borrowed and invested at the same rate of interest $6.25%$ " . Am I right ? @alexjo – User9523 Apr 01 '16 at 13:32
  • they should've added: (1) income are totally reinvested at the same rate 6.5% (2) the loan is repayed at the end of 5 years. – alexjo Apr 01 '16 at 14:04

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