Question

An investment of $185,575 is expected to generate returns of $65,000 per year for each of the next 4- years. What is the investment's internal rate of return? Below is a table for the present value of $1 at compound interest. Year 6% 10% 12% 15% 1 0.943 0.909 0.893 0.870 2 0.890 0.826 0.797 0.756 3 0.840 0.751 0.712 0.658 4 0.792 0.683 0.636 0.572 5 0.747 0.621 0.567 0.497 Below is a table for the present value of an annuity of $1 at compound interest. Year 6% 10% 12% 15% 1 0.943 0.909 0.893 0.870 2 1.833 1.736 1.690 1.626 3 2.673 2.487 2.402 2.283 4 3.465 3.170 3.037 2.855 5 4.212 3.791 3.605 3.353

Answer 1

Internal rate of return annuity present value per $ = Initial Investment / annual investment

= $185,575 / $65,000

= 2.855

Since return is coming annually and in equal amount, this is a case of present value of annuity and looking in table value of PVA for 4 years horizon, this value is coming under 15%, so internal rate of return is 15%.

Below is a table for the present value of $1 at compound interest.

Year 6% 10% 12% 15%

1 0.943 0.909 0.893 0.870

2 0.890 0.826 0.797 0.756

3 0.840 0.751 0.712 0.658

4 0.792 0.683 0.636 0.572

5 0.747 0.621 0.567 0.497

Below is a table for the present value of an annuity of $1 at compound interest.

Year 6% 10% 12% 15%

1 0.943 0.909 0.893 0.870

2 1.833 1.736 1.690 1.626

3 2.673 2.487 2.402 2.283

4 3.465 3.170 3.037 2.855

5 4.212 3.791 3.605 3.353