Question
In: Finance
An agricultural real estate investor wants to purchase a failing farm and flip it into a...
An agricultural real estate investor wants to purchase a failing farm and flip it into a profitable cattle operation. It will cost her $500,000 to take over the operation and make any necessary updates to the operation. Under her management, she estimates the cash flow from this operation will be $76,000 for 5 years. After those 5 years, she plans to sell the operation for $350,000. What is the internal rate of return on her investment?
|
13.4% |
||
|
14.9% |
||
|
12.9% |
||
|
10.3% |
Solutions
Expert Solution
> Concept - Internal rate of return (IRR) is the interest rate at which the net present value of all the cash flows (both positive and negative) from a project or investment equal zero.
> Formula - 
> Calculation
- NPV at different rates calculation
|
Year |
Cashflows |
NPV @ 13.4 |
NPV @ 14.9% |
NPV @ 12.9% | NPV @ 10.317% |
|
0 |
-500000 |
-500000 | -500000 | -500000 | -500000 |
|
1 |
76000 | 67019.4 | 66144.5 | 67316.2 | 68892.3 |
|
2 |
76000 | 59100 | 57567 | 59624.6 | 62449.5 |
|
3 |
76000 | 52116.4 | 50101.8 | 52811.9 | 56609.1 |
| 4 | 76000 | 45958.02 | 43604.7 | 46777.5 | 51314.9 |
| 5 | 76000 | 40527.4 | 37950.2 | 41432.8 | 46515.9 |
| 5 | 350000 | 186639.2 | 174770.4 | 190808.8 | 214217.9 |
|
NPV |
-48639.7 |
-69861.4 |
-41228.23 | 0 |
The IRR is 10.317% or 10.3
The correct option is option D.
Hope you understand the solution.
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