Question

Suppose you invest $ 4 comma 000 today and receive $ 9 comma 250 in five years. a. What is the internal rate of return​ (IRR) of this​ opportunity? b. Suppose another investment opportunity also requires $ 4 comma 000 ​upfront, but pays an equal amount at the end of each year for the next five years. If this investment has the same IRR as the first​ one, what is the amount you will receive each​ year?

Answer 1

Answer:

IRR is 18.25%

Annual amount is -$0.225 which closest to zero dollar,because at irr the investment return is zero

Explanation:

The formula for IRR in excel is :irr(values)

The formula can be applied to the cash outflow of $4,000 and cash inflow of $9,250 in five years' time as follows

Years                Cash flow

0                       -$4,000

1                          $0

2                          $0

3                           $0

4                            $0

5                          $9,250

irr(-$4000 to $9,250)

irr is 18.25%

The amount of receivable each year can be computed using pmt formula in excel

=pmt(rate,nper,-pv,fv)

rate is the irr of 18.25%

pv is -$4000

fv is the future amount 0f $9,250

=pmt(18.25%,5,-4000,9250)

pmt=-$0.225 which closest to zero amount