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4 February, 18:00

Suppose you purchased an income producing property for $95,000 five years ago. In Year 1, you were able to negotiate a lease that paid $10,000 per year at the end of each year. If you are able to sell the property at the end of year 5 for $100,000 (after receiving our final lease payment), what was the internal rate of return (IRR) on this investment

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  1. 4 February, 18:22
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    The internal rate of return of this investment is 9.57%

    Explanation:

    we already told that the property investment was $95000 initially then the the value of the property appreciated to $100000 in 5 years so we will use both these amounts to get what is the rate of return in this investment so we will use the future value formula:

    Fv = Pv (1+i) ^n

    where Fv is the future value of the investment $100000 + $50000=$150000 (we also considered the lease amount of $10000 per year for 5 years which is $50000)

    Pv is the present value of the investment $95000

    IRR is the internal rate of return for the investment which we will calculate

    n is the period of 5 years in which the investment was done in

    therefore we will substitute the above mentioned values to the formula also mentioned above and solve for IRR:

    150000 = 95000 (1+IRR) ^5 then we divide by 95000 both sides

    150000/95000 = (1+IRR) ^5 then we get the 5th root of both sides

    1.095654258 = 1 + IRR then we subtract 1 from both sides

    0.095654258 = IRR then we multiply by 100 for a percentage

    9.57% = IRR which this is the internal rate of return for the investment. rounded off to two decimal places.
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