Question

An investment firm is selling a new product that will pay $100at the end of each of the next 20 years. If the new investment costs $1,246 to purchase, what is its internal rate of return (IRR)? 11% 7% 3% 9% 5%

Answer 1

Answer:

The correct answer is 5%

Explanation:

We use excel or a spreadsheet to calculate this ratio.  See document attached.

We use a cash flow to solve this problem.  

At moment 0 we have the investment cost ,  in this case $1,246. From period 1 to period 20,  we have incomes o benefits of  $100. Then, we calculate the Net cash flow that is  the difference between benefits and cost.

We use all the result (positive and negative) in Net cash flow row to get the IRR.  

Download xlsx