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

Question

3 years ago

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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%

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1 answer:

zzz [600] · Answer 1 · 2022-04-12T15:33:29+03:00

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