If you invest $2111 now and are promised payments of $910 two years from now, $998...

If you invest $2111 now and are promised payments of $910 two years from now, $998 three years from now, and $1122 four years from now, what is the rate of return [ROR] using PW factors.

Expert Solution

Solution :-

If Interest Rate = 10 %

NPV = - $2,111 + [ $910 / ( 1 + 0.10 )² ] + [ $998 / ( 1 + 0.10 )³ ] + [ $1,122 / ( 1 + 0.10 )⁴ ]

= - $2,111 + ( $910 * 0.826 ) + ( $998 * 0.751 ) + ( $1,122 * 0.683 )

= $157.22

If Interest Rate = 15%

NPV = - $2,111 + [ $910 / ( 1 + 0.15 )² ] + [ $998 / ( 1 + 0.15 )³ ] + [ $1,122 / ( 1 + 0.15 )⁴ ]

= - $2,111 + ( $910 * 0.756 ) + ( $998 * 0.657 ) + ( $1,122 * 0.572 )

= - $125.20

Now IRR ( rate of Return ) = 10% + [ $157.22 / ( $157.22 + $125.20 ) ] * ( 15% - 10% )

= 10% + 2.68%

= 12.68% ( Approx )

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Rahul Sunny answered 2 years ago

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