Question

Assume you invest $ 3,100 today in an investment that promises to return $ 6,711 in exactly 10 years.

a. Use the​ present-value technique to estimate the IRR on this investment.

b. If a minimum annual return of 13 % is​ required, would you recommend this​ investment?

a. The IRR of the investment is ______​%.​(Round to the nearest whole​ percent.)

b. If a minimum return of 13 % is​ required, would you recommend this​ investment? 

Answer 1

a]

Future value = present value * (1 + rate of return)^{number of years}

$6711 = $3100 * (1 + rate of return)¹⁰

(1 + rate of return)¹⁰ = ($6711 / $3100)

rate of return =  ($6711 / $3100)^1/10 - 1

rate of return = 8.03%

The IRR is 8.03%

b]

If a minimum return of 13 % is​ required, this investment is not recommended as the IRR is lower than the minimum required return.