Question

Abul has purchased an investment that he expects to produce income of $3,000 at the end of the first year and $4,000 at the end of the second year. If he pays $5,800 for this investment, what is the internal rate of return?

Answer 1

D9 * fic =1/(1.15189) : B A F G H I J K L M N O P Q R IRR IRR is the rate at which NPV = 0 Let IRR = 15% PV of Cash Flows Year 0 1 2 Cash Flows($) -5,800.00 3,000.00 4,000.00 NPV PV Factor 1 0.8696 0.7561 2,608.70 3,024.57 - 166.73 Let IRR = 10% Year PV Factor 1 2 Cash Flows($) -5,800.00 3,000.00 4,000.00 NPV 0.9091 0.8264 PV of Cash Flows -5,800.00 2,727.27 3,305.79 233.06 Now, By Interpolation Method IRR = Lowest Discount Rate + [NPV at Lower rate * (Higher Rate - Lower Rate) / (NPV at Lower Rate - NPV at Higher Rate)] = 0.10+[233.06*(0.15-0.10)/(233.06-(-166.73))] = 0.10+[233.06*0.05/399.79] = 0.10+[11.653/399.79] = 0.10+0.02915 IRR = 0.12915 or 12.915% ... YTM Sheet30 Sheet73 ... + A A O * ENG 4:30 PM 10/8/2019