Question

Assume that an industrial building can be purchased for $1,500,000 today, is expected to yield cash flows of $90,000 for each of the next seven years (with the cash flows occurring at the end of each year), and can be sold at the end of the seventh year for $1,650,000. Calculate the internal rate of return (IRR) for this transaction.

Answer 1

This is calculated using a financial calculator by inputting the below:

• Press the CF button.
• CF0= -$1,500,000.
• Cash inflow for of $90,000 for each of the 6 year is entered.
• Enter a cash inflow of $90,000 + $1,650,000= 1,740,000 for the seventh year.
• Press Enter and down arrow after inputting each cash flow.
• After entering the last cash flow, press the IRR button and enter the interest rate of 10% to get the IRR of the project.

The IRR for the transaction is 7.15%.