The IRR measures profit. It therefore measures return "on" investment and not capital recovery. However, any investment that returns more than it cost will be a profitable investment and will have an IRR that is both positive and measurable. Lets consider the following example. Suppose that you purchase an apartment complex at the beginning of Year 1 (or the end of Year 0) for $698. You expect to earn $15,000 per year for the next 4 years at the end of each year, but at the end of the year 5 years from now you expect cash flows to equal $115,000. Here is what these cash flows look like in a table:
n |
amount |
CF0 |
$ (698) |
CF1 |
$ 15,000 |
CF2 |
$ 15,000 |
CF3 |
$ 15,000 |
CF4 |
$ 15,000 |
CF5 |
$ 115,000 |
Compute the IRR and report it as a percent .
Calculation for IRR is shown below:
Working is given below:
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