Question

Compute the IRR on the following cash flow streams: (a) An initial investment of $25,000 followed by a single cash flow of $37,450 in year 6. (b) An initial investment of $1 million followed by a single cash flow of $1,650,000 in year 4. (c) An initial investment of $2 million followed by cash flows of $1,650,000 and $1,250,000 in years 2 and 4, respectively.

Explaining how to calculate it using financial calculator....

Answer 1

a.

Initial Investment = $25,000

Cash Flow in Year 6 = $37,450

Calculating IRR,

Using TVM Calculation,

I = [FV = 37,450, PV = 25,000 T = 6, PMT = 0]

I = 6.97%

b.

Initial Investment = $1,000,000

Cash Flow in Year 4 = $1,650,000

Calculating IRR,

Using TVM Calculation,

I = [PV = 1,000,000, FV = 1,650,000 T = 4, PMT = 0]

I = 13.34%

c.

Initial Investment = $2,000,000

Cash Flow in Year 2 = 1,650,000

Cash Flow in Year 4 = 1,250,000

Calculating IRR,

2,000,000 = 1,650,000/(1 + IRR)² + 1,250,000/(1 + IRR)⁴

IRR = 14.20%