NewEnvironments:Suppose you have an asset that costs

Suppose you have an asset that costs $15 in time period zero and has an IRR of 12%. With a retained earning rate of 5% on your remaining $7, what is the highest loan rate that would support investing in this asset?

**Solution**

Initial Cost = IC = $15

IRR = 12%

Retained Earning Rate = RER = 5%

Balance Remaining = BR = $7

The highest blended loan rate we can have is the same as the IRR. The following equation can be set up to solve for the interest rate, i.

IRR = (BR/IC)*RER + ([IC-BR]/IC)*i

Solving for i:

i= [IRR - (BR/IC)*RER]/([IC-BR]/IC)

i= [12% -($7/$15)*5%]/([$15-$7]/$15)

**i=18.125%**

page revision: 3, last edited: 16 May 2016 21:51