Question

An investment is expected to produce the following annual year-end cash flows: Year 1: $5,000 Year 2: $1,000 Year 3: $0 Year 4: $5,000 Year 5: $6000 Year 6: $863.65 The investment will cost $13,000 today. What will be the IRR (compounded annually) on this investment?

Answer 1

The IRR (compounded annually) on this investment is 10%.

Explanation:

The formula to compute IRR on this investment:

\begin{aligned} &NPV = \frac {CF_0}{(1 + r)^0} + \frac {CF_1}{(1 + r)^1} + \frac {CF_2}{(1 + r)^2} + \frac {CF_3}{(1 + r)^3}\\ \end{aligned}NPV=(1+r)0CF0+(1+r)1CF1+(1+r)2CF2+(1+r)3CF3

 13000 = 0 +5000(1 +r)1+1000(1 +r)2+0(1 +r)3+5000(1 +r)4+6000(1 +r)5+863.65(1 +r)6

Solve the equation using calculator:

 r = 10%