Question

You are offered a chance to buy an asset for $4,500 that is expected to produce cash flows of $750 at the end of Year 1, $1,000 at the end of Year 2, $850 at the end of Year 3, and $6,250 at the end of Year 4. What rate of return would you earn if you bought this a. 22.64% b. 20.60% c. 23.77%d. 26.72% e. 17.21%

Answer 1

Answer:

a. 22.64%

Explanation:

At first we are going to need to compute the Internal rate of return(IRR) (in which the current value of inflows = the current value of outflows)

Let's let the IRR be x percent

Therefore $4,500 = $750 / (1.0x)

+ $1,000 / (1.0x) power 2 + $850 / (1.0x) power 3

+ $6,250 / (1.0x) power 4

Thus, x = approximate return rate = 22.64 percent