What is the internal rate of return (IRR) on an investment with the following cash flows?...

What is the internal rate of return (IRR) on an investment with the following cash flows? Holding period 5 years. Round your answer to nearest 0.25%. Please show work (NO EXCEL)

Year	Net Income
Purchase Price	$4,000,000
1	$250,000
2	$300,000
3	$350,000
4	$400,000
5	$450,000
Resale	$4,750,000 (net of costs)

Expert Solution

Calculation of IRR	11%	12%
Year	Cash-flow	PV factor, 1/(1+r)^t	PV factor, 1/(1+r)^t	PV@11%	PV@12%
0	$ (4,000,000)	1.0000	1.0000	$(4,000,000.00)	$ (4,000,000.00)
1	$ 250,000	0.9009	0.8929	$ 225,225.23	$ 223,214.29
2	$ 300,000	0.8116	0.7972	$ 243,486.73	$ 239,158.16
3	$ 350,000	0.7312	0.7118	$ 255,916.98	$ 249,123.09
4	$ 400,000	0.6587	0.6355	$ 263,492.39	$ 254,207.23
5	$ 450,000	0.5935	0.5674	$ 267,053.10	$ 255,342.09
5	$ 4,750,000	0.5935	0.5674	$ 2,818,893.81	$ 2,695,277.56
			NPV	$ 74,068.23	$ (83,677.58)

		IRR	=Lower rate + Difference in rates*(NPV at lower rate)/(Lower rate NPV-Higher rate NPV)

		IRR	'=11%+ (12%-11%)*(74068.23/(74068.23+83677.58)
		IRR	=11.47%
		IRR	=11.50%

jeff jeffy answered 1 year ago

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