Question

U2 – 20 / Suppose you invest $4,000 today and receive $9,750 in five years.

a. What is the internal rate of return? (IRR) of this? opportunity? The IRR of this opportunity is ____% (Round to two decimal? places.)

b. Suppose another investment opportunity also requires $4,000 upfront, but pays an equal amount at the end of each year for the next five years. If this investment has the same IRR as the first? one, what is the amount you will receive each? year?

Answer 1

a

Future Value = Present Value*(1+Rate or IRR)^Years

9750 = 4000*(1+Rate)^5

(1+Rate)^5 = 9750/4000

1+Rate = (9750/4000)^(1/5)

Rate = 1.1951-1

IRR = Rate = 19.51%

b

Payment:	#
Present value = PV =	$4,000.00
R = Rate = 19.51% =	19.51%
N = Number of cash flows =	5
PMT = Cash flow per year = P x R x (1+R)^N / ((1+R)^N - 1)
Payment =4000 x 19.51% x (1+19.51%)^5 / ((1+19.51%)^5 -1) =	$1,323.12