Question

WG Investors is looking at three different investment opportunities. Investment one is a​ five-year investment with a cost of ​$850 and a promised payout of ​$1,700 at maturity. Investment two is a​ seven-year investment with a cost of ​$850 and a promised payout of ​$2,125. Investment three is a​ ten-year investment with a cost of ​$850 and a promised payout of ​$4,080. WG Investors can take on only one of the three investments. Assuming that all three investment opportunities have the same level of​ risk, calculate the effective annual return for each​ investment, and select the best investment choice

What is the effective annual return for investment​ one, a​ five-year investment with a cost of ​$850 and a promised payout of $ $1,700 at​ maturity?

What is the effective annual return for investment​ two, a​ seven-year investment with a cost of ​$850 and a promised payout of $2,125​?

What is the effective annual return for investment​ three, a​ ten-year investment with a cost of ​$850 and a promised payout of $4,080​?

Answer 1

Project
IRR is the rate at which NPV =0	0
IRR	14.87%
Year	0	1	2	3	4	5
Cash flow stream	-850.000	0.000	0.000	0.000	0.000	1700.000
Discounting factor	1.000	1.149	1.320	1.516	1.741	2.000
Discounted cash flows project	-850.000	0.000	0.000	0.000	0.000	850.000
NPV = Sum of discounted cash flows
NPV Project =	0.000
Where
Discounting factor =	(1 + discount rate)^(Corresponding period in years)
Discounted Cashflow=	Cash flow stream/discounting factor
IRR=	14.87%

IRR is the rate at which NPV =0	0
IRR	13.99%
Year	0	1	2	3	4	5	6	7
Cash flow stream	-850.000	0.000	0.000	0.000	0.000	0.000	0.000	2125.000
Discounting factor	1.000	1.140	1.299	1.481	1.688	1.924	2.193	2.500
Discounted cash flows project	-850.000	0.000	0.000	0.000	0.000	0.000	0.000	850.000
NPV = Sum of discounted cash flows
NPV Project =	0.000
Where
Discounting factor =	(1 + discount rate)^(Corresponding period in years)
Discounted Cashflow=	Cash flow stream/discounting factor
IRR=	13.99%

IRR is the rate at which NPV =0	0
IRR	16.98%
Year	0	1	2	3	4	5	6	7	8	9	10
Cash flow stream	-850.000	0.000	0.000	0.000	0.000	0.000	0.000	0.000	0.000	0.000	4080.000
Discounting factor	1.000	1.170	1.369	1.601	1.873	2.191	2.563	2.998	3.507	4.103	4.800
Discounted cash flows project	-850.000	0.000	0.000	0.000	0.000	0.000	0.000	0.000	0.000	0.000	850.000
NPV = Sum of discounted cash flows
NPV Project =	0.000
Where
Discounting factor =	(1 + discount rate)^(Corresponding period in years)
Discounted Cashflow=	Cash flow stream/discounting factor
IRR=	16.98%