Paige Ouimet wants to buy a tugboat today. Rather than paying immediately, she offers to pay $150,000 in three years. It will cost Tugboat Corp. $115,830 to build the tugboat immediately. The relevant cash flows to Tugboat Corp. are displayed in Figure 4.10.

What interest rate should Tugboat Corp. charge to neither gain nor lose on the sale? Cash Flows for Tugboat

The ratio of construction cost (present value) to sale price (future value) is:

We must determine the interest rate that allows $1 to be received in three years to have a present value of $.7722. Table A.1 tells us that 9 percent is that interest rate.

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Cash inflows Cash outflows Year 0 -$115,830 $150,000 3