Question

The IRR measures profit. It therefore measures return "on" investment and not capital recovery. However, any...

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 .

Homework Answers

Answer #1

Calculation for IRR is shown below:

Working is given below:

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