Question

You buy a rental property for $180,000. Assuming that you could sell the property for $250,000 at the end of 6 years, what is your return based on the following cash flows? Year 0 (now) = – 180,000 End of Year 1 = + 24,000 End of Year 2 = + 24,000 End of Year 3 = – 3,000 and +12,000 End of Year 4 = + 18,000 End of Year 5 = + 30,000 End of Year 6 = + 32,000

Answer 1

15.542%

Explanation:

For uneven cash flows such as those in this problem, there is no formula for "internal rate of return" (IRR). It must be computed graphically or iteratively. Spreadsheets and financial calculators are equipped to do this calculation. Attached is the result of the calculation done by a graphing calculator.

The sum of "present value" of each of the cash flows is zero when the discount rate is the IRR.