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26 May, 13:23

Suppose you invest $ 4 comma 000 today and receive $ 9 comma 250 in five years. a. What is the internal rate of return (IRR) of this opportunity? b. Suppose another investment opportunity also requires $ 4 comma 000 upfront, but pays an equal amount at the end of each year for the next five years. If this investment has the same IRR as the first one, what is the amount you will receive each year?

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  1. 26 May, 13:40
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    IRR is 18.25%

    Annual amount is - $0.225 which closest to zero dollar, because at irr the investment return is zero

    Explanation:

    The formula for IRR in excel is : irr (values)

    The formula can be applied to the cash outflow of $4,000 and cash inflow of $9,250 in five years' time as follows

    Years Cash flow

    0 - $4,000

    1 $0

    2 $0

    3 $0

    4 $0

    5 $9,250

    irr (-$4000 to $9,250)

    irr is 18.25%

    The amount of receivable each year can be computed using pmt formula in excel

    =pmt (rate, nper,-pv, fv)

    rate is the irr of 18.25%

    pv is - $4000

    fv is the future amount 0f $9,250

    =pmt (18.25%,5,-4000,9250)

    pmt=-$0.225 which closest to zero amount
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