An investment of $1,000 will return $60 annually forever. What is its internal rate of return?...

Question

Question

An investment of $1,000 will return $60 annually forever. What is its internal rate of return? Please show work.

Answer 1

Answer #1

IRR is the rate of return at which NPV is zero.

NPV = Value of Investment - PV of cash flows expected in future (which is a perpetuity in this case)

PV of a perpetuity is

PV of Perpetuity = – PV = Present Value D = Dividend or Coupon per period r = discount rate

- 0001 = 0

1000 = 60/r

r = 60/1000 = 6%

Answer 2

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