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Find IRR for following cash flows:                                     0_____1_

Find IRR for following cash flows:

                                    0_____1_____2_____3_____4

                                    ($100) $10       $10     $10     $110

                        a) use calculator, make sure that you know the procedure.

                                    p/yr=____, N=____, PMT=_____, FV=_____,PV=_____, IRR=____% per period.

                        b) use spreadsheet, make sure that you know the procedure

                                    Show spreadsheet printout

c) use intuition: if initial cashflow is changed to (90) the IRR will be Higher/lower because _________________________________

            Hint: Consider the impact of a higher discount rate on the PV of a given set of cash flows.

6)         The Stated rate i=10% per year compounded semi-annually. The Effective annual rate is __________%

                        a) use built-in calculator functions

                        b) use formula

7)         Term structure: Two-year rate is i=5% per year

                                    Three-year rate is i=6% per year

                        Find the implied forward rate for the third year. i=_____%

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Answer #1

Answer to Problem Q#5 (First question in the list Requirement-(a # of cash flows in a year, p/yr # of years of repayment, NPER Annual cash flows, PMT Initial cash flow, PV Final years cash flow, FV Rate of return charged by uncle 1 4 $10 $100 $100 [it is input as $100 instead of $10 as the $10 has been considered as annual cash flows already above] 10.00% [Ref: NOTE NOTE Rate of return charged by uncle is calculated using EXCEL FUNCTION RATE(nper,pmt,pv,fv,type) where nper-4; pmt--10; pv 100; fv--100; Here value for fv is negative as it denotes cash inflow; pv is positive as it denotes outflow 1 # of cash flows in a year, p/yr 2 # of years of repayment, NPER 3 Annual cash flows, PMT 4 Initial cash flow, PV 5 Final years cash flow, FV 6 Rate of return charged by uncleRATE(B2,-B3,B4,-B5) [Ref: NOTE] 4 $10 $100 $100 [It is input as $100 instead of $10 as the $10 has been considered as annual cash flows already above]Requirement-(b) & (c Norma Intuition Cash Cash Year EXCEL SCREENSHOT Flows Flows $100-$90 $10 $10 $10 $110 Intuition Cash $10 $10 $10 $110 13.39% 1 Cash Year 2 $100 $10 $10 $10 $110 IRR(B3:B7 $90 $10 $10 $10 $110 IRR(C3:C7 2 IRR 10.00% 8 IRR IRRs can be calculated using EXCEL FUNCTION IRR(values, guess) inserting cash flows in B3 thru C7 as per EXCEL SCREENSHOT copied above IRR stands for Internal Rate of Return which is the discount rate that makes projects future cash equals to initial investment or in other words IRR is the rate which makes NPV equals to zero Intuition: If initial cashflow is changed to (90) the IRR will be Higher because initial cash outflow decreases though future cash inflows remain same

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