Question

Given the following expected cash flow stream, determine the IRR of the proposed investment in an...

Given the following expected cash flow stream, determine the IRR of the proposed investment in an income-producing property and determine whether or not the investment should be pursued using IRR as your decision-making criteria: investment horizon: five years; expected yearly cash flow in each of the next five years: $127,628; expected sale price at end of five years: $1,595,350; required return on equity: 5%; current market price of property: $1,750,000

Multiple Choice

  • A. IRR is 5.72%; decision is to invest.

  • B. IRR is 4.92%; decision is to invest.

  • C. IRR is 4.92%; decision is to not invest.

  • D. IRR is 5.72%; decision is to not invest.

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Answer #1
Project
IRR is the rate at which NPV =0
IRR 0.057164503
Year 0 1 2 3 4 5
Cash flow stream -1750000 127628 127628 127628 127628 1722978
Discounting factor 1 1.057165 1.117597 1.181484 1.2490226 1.320422
Discounted cash flows project -1750000 120726.7 114198.6 108023.5 102182.3 1304869
NPV = Sum of discounted cash flows
NPV Project = 1.09312E-05
Where
Discounting factor = (1 + IRR)^(Corresponding period in years)
Discounted Cashflow= Cash flow stream/discounting factor
IRR= 5.72%

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