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Suppose an industrial building can be purchased for $2,500,000 and is expected to yield cash flows...

Suppose an industrial building can be purchased for $2,500,000 and is expected to yield cash flows of $160,000 in each of the next five years. (Note: assume payments are made at end of year.) If the building can be sold at the end of the fifth year for $2,700,000, calculate the IRR for this investment over the five-year holding period.

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Answer #1

Let irr be x%
At irr,present value of inflows=present value of outflows.

2,500,000=160,000/1.0x+160,000/1.0x^2+160,000/1.0x^3+160,000/1.0x^4+160,000/1.0x^5+2,700,000/1.0x^5

Hence x=irr=7.77%(Approx).

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