An investment of $210 produces a perpetual stream of cash inflows. Next year, the cash inflow will be $10.50, and the cash inflow will grow at 5% per year. What is the internal rate of return on this investment?

Question

Abagail Mcintosh

Business

20 November, 18:08

An investment of $210 produces a perpetual stream of cash inflows. Next year, the cash inflow will be $10.50, and the cash inflow will grow at 5% per year. What is the internal rate of return on this investment?

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Answers (1)

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Makayla Pittman · Answer 1

The answer is the internal rate of return on this investment is 10%.

Explanation:

The internal rate of return is the discount rate bringing the present value of the perpetual stream of cash inflows equal to its initial investment which is $210.

We apply the formula for calculating the present value of growing perpetuity to find out the internal rate of return, which is denoted as X in the below equation:

10.5 / (X - 5%) = 210 X - 5% = 10.5 / 210 = 5% X = 5% + 5% = 10%.

So, the internal rate of return on this investment is 10%.