Question

A property was acquired for $950,000 and then produced cash flows of $100,000, $120,000, $135,000, $135,000, and $125,000 at the end of years one through five, respectively. The property was then sold for $1,200,000 at the end of the fifth year. What was the internal rate of return for this investment?

Answer 1

Answer:

IRR= 17%

Explanation:

The internal rate of return is the profitability (IRR) of the money that remains invested during a project life. To calculated we need to use the net present value formula (NPV). The IRR is the rate at which the NPV is cero. I attached the formula but it is better to calculate the IRR using excel.

First, you have to copy all cash flows including the investment with a negative sign. Then you use the financial formula "IRR" in this way:

"=IRR(C3:C8)" (I attached the excel figure)

In this case, you have to sum the cash flow produced by the property plus the earnings of the its sale on year 5.