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Assume you have the following cash flow in actual dollars: Year 0 -$112; Year 1 -$53;...

Assume you have the following cash flow in actual dollars: Year 0 -$112; Year 1 -$53; Year 2 $93; Year 3 $76; Year 4 $147. The general inflation rate is 4.9%. What is the inflation-free IRR of this cash flow? Express your answer as a percentage.

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Answer #1

Nominal IRR is computed as follows, using Excel IRR function.

Year Cash flow ($)
0 -112
1 -53
2 93
3 76
4 147
IRR = 26.25%

Inflation-free (Real) IRR = Nominal IRR - Inflation rate = 26.25% - 4.9% = 21.35%

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