Question

What is the irr of an investment that costs $18,500 and pays $5,250 a year for 5 years?

Answer 1

The Internal rate of return (IRR) of an investment is found to be 13%.

What is Internal rate of return (IRR)?

The internal rate of return (IRR) is a financial analysis metric used to estimate the profitability of possible investments.

• In a discounted cash flow analysis, IRR is a discount rate that renders the net present value (NPV) among all cash flows equal to zero.
• IRR calculations employ the same method as NPV calculations.
• Keep in mind that the IRR is not the project's actual dollar value.
• The annual return is what brings the NPV to zero.

Now, according to the question;

Total investment = $18,500.

Returns = $5,250/year

Time = 5 years

Use the formula for calculation of IRR value.

$18,500 = $5,250 {[1 - 1/(1 + IRR)5] / IRR}

Simplyfying,

IRR = 12.92%

Therefore, the internal rate of returns are calculated as 13% (approximately).

To know more about internal rate of return, here

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