Question

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An investor invests $11000. The investment pays $4000 at the end of year 1, $5000 at...

An investor invests $11000. The investment pays $4000 at the end of year 1, $5000 at the end of year 2 and $4500 at the end of year 3. (a) Calculate the internal rate of return (IRR) of the investment. (b) Calculate the net present value (NPV) of the investment using interest preference rate of 8.5%.

Show all works, and please calculate it with math formula instead of financial calculator!! Thank you!

Solutions

Expert Solution

Calculation of NPV 8.50%
Year Cash flow PV factor, 1/(1+r)^t PV-Board game
0 $         (11,000)     1.0000 $    (11,000.00)
1 $            4,000     0.9217 $       3,686.64
2 $            5,000     0.8495 $       4,247.28
3 $            4,500     0.7829 $       3,523.09
NPV $          457.00
Calculation of IRR 10% 11%
Year Cash flow PV factor, 1/(1+r)^t PV factor, 1/(1+r)^t PV@10% PV@11%
0 $         (11,000)           1.0000     1.0000 $    (11,000.00) $(11,000.00)
1 $            4,000           0.9091     0.9009 $       3,636.36 $    3,603.60
2 $            5,000           0.8264     0.8116 $       4,132.23 $    4,058.11
3 $            4,500           0.7513     0.7312 $       3,380.92 $    3,290.36
NPV $          149.51 $       (47.92)
IRR =Lower rate + Difference in rates*(NPV at lower rate)/(Lower rate NPV-Higher rate NPV)
IRR '=10%+ (11%-10%)*(149.51/(149.51+47.92)
IRR 10.76%

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