Question

You are offered a chance to buy an asset for $200,500 that is expected to produce cash flows of $100,000 at the end of Year 1, $42,000 at the end of Year 2, $52,850 at the end of Year 3, and $43,250 at the end of Year 4. What rate of return (IRR) would you earn if you bought this asset?

Please solve without Excel and show formulas used!

Answer 1

What rate of return (IRR) would you earn if you bought this asset?

8,48%

Step-by-step explanation:

To find the IRR it's necessary to know which is the discount rate that applied to the cash flow of the assets gives a value that compensate the investment of $200,500.

Year 1 $100.000 / (1+0,0848)^1 = $92.182

Year 2 $100.000 / (1+0,0848)^2 = $35.690

Year 3 $100.000 / (1+0,0848)^3 = $41.398

Year 4 $100.000 / (1+0,0848)^4 = $31.230

Total Present Value of Cash Flow=

$92.182 + $35.690 + $41.398 + $31.230 = $200,500

There is no way to find the IRR without Excel, the only way is to try with different rates in the current cash flow formula.