You are offered a chance to buy an asset for $8,000 that is expected to produce...

You are offered a chance to buy an asset for $8,000 that is expected to produce cash flows of $750 at the end of Year 1, $1,000 at the end of Year 2, $850 at the end of Year 3, and $6,250 at the end of Year 4. What rate of return would you earn if you bought this asset?

Expert Solution

Ans 3.01%

Year	Project Cash Flows (i)		DF@ 2% (ii)	PV of Project A ( (i) * (ii) )	DF@ 10% (iii)	PV of Project A ( (i) * (iii) )
0	-8000		1	(8,000.00)	1	(8,000.00)
1	750		0.980	735.29	0.909	681.82
2	1000		0.961	961.17	0.826	826.45
3	850		0.942	800.97	0.751	638.62
4	6250		0.924	5,774.03	0.683	4,268.83
		Total		271.47		(1,584.28)


	IRR =	Ra + NPVa / (NPVa - NPVb) * (Rb - Ra)
		2% + 271.47 / (271.47+1584.28)*8%
		3.01%

jeff jeffy answered 8 months ago

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