Question

Two investors have the following pattern of expected returns (Before-Tax Cash Flows): Investment A: Y1: $5,000; Y2: $10,000; Y3: $12,000; Y4: $15,000; Y4 (Sale): $120,000. Investment B: Y1: $2,000; Y2: $4,000; Y3: $1,000; Y4: $5,000; Y4 (Sale): $180,000. Investment A requires an outlay of $110,000 and Investment B requires an outlay of $120,000. What is the BTIRR on each investment?

Answer 1

Answer:

Investment A = 11.089%

Investment B = 12.772%

Explanation:

The internal rate of return is the discount rate that equates the after tax cash flows from an investment to the amount invested.

The internal rate of return can be calculated using a financial calculator

For investment A,

Cash flow in year zero = -$110,000

Cash flow in year 1 = $5,000

cash flow in Y2 = $10,000

cash flow in Y3 = $12,000

Cash flow in Y4 = $15,000 + $120,000 = $135,000

Irr = 11.089%

For investment B,

Cash flow in year zero = -$120,000

Cash flow in year one = $2,000

cash flow inY2: $4,000

cash flow in Y3: $1,000

cash flow in Y4: $5,000 + $180,000 = $185,000

IRR = 12.772%

To find the IRR using a financial calacutor:

1. Input the cash flow values by pressing the CF button. After inputting the value, press enter and the arrow facing a downward direction.

2. After inputting all the cash flows, press the IRR button and then press the compute button.

I hope my answer helps you