Determine the IRR of the following: A) An initial investment of $10,750 resulting in a free...
Determine the IRR of the following:
A) An initial investment of $10,750 resulting in a free cash flow of $3,500 at the end of year 1, $2,000 at the end of year 2, and $7,000 at the end of year 3.
B) An initial investment of $5,000 resulting in a SINGLE free cash flow of $38,077 after 10 years.
Homework Answers
Let irr be x%
At irr,present value of inflows=present value of outflows.
a.
10,750=3,500/1.0x+2,000/1.0x^2+7,000/1.0x^3
Hence x=irr=6.92%(Approx).
b.5,000=38,077/1.0x^10
1.0x^10=(38,077/5000)
1.0x =(38,077/5000)^(1/10)
x=1.2251-1
=22.51%(Approx).
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