Question

a. The CEO first notices that he could always turn multiple negative cash flows into a single negative cash flow by adding all the negative cash flows together, getting that much money at time 0, and just holding onto it until he needs to make the payments. Calculate the IRR of the above cash flow stream if all the negative cash flows are moved to year 0

Answer 1

Answer: 11.32%

Explanation:

Time cash flow

Year 0-$8,000.00

Year 1$2,000.00

Year 2$500.00

Year 3$8,000.0

IRR= 11.32%

Answer 2

The new Internal Rate of Return (IRR) if the CEO moved all the negative cash flow will amount to 7.7%. (Please see the attached spreadsheet).

What is Internal Rate of Return (IRR)?

The IRR of an investment is defined as the estimate of the profitability of future investments.

It is a discount rate that is used to evaluate an the potential profitability or gains of investment over a certain period of time.

The IRR helps investors to ascertain whether or not an investment is worth committing funds to.

A positive IRR means the investment will yield value, while a negative IRR means the investment will give back a loss or an amount of cashflow that is less than the initial capital invested.

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