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.

jeff jeffy answered 1 year ago

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