Question

You paid $749,000 for a duplex and financed 75% of the purchase price. Your forecasted cash flows for the property are listed below and you expect to sell the property for $720,000 at the end of year 5 and you owe $487,218.98 on the property. What is your expected internal rate of return?

a)Cash flow year 1 $16000
b)Cash flow year 2 $17000
c)Cash flow year 3 $16000
d)Cash flow year 4 $15000
e)Cash flow year 5 $18000
Answer should be formatted as a percent with two decimal places.

Answer 1

To calculate the expected internal rate of return for a duplex investment, consider the cash flows over the 5-year period. The expected IRR is approximately 7.02%.

Step-by-step explanation:

To calculate the expected internal rate of return (IRR), you need to consider the cash flows over the 5-year period. In this case:

• Year 1: Cash flow = $16,000
• Year 2: Cash flow = $17,000
• Year 3: Cash flow = $16,000
• Year 4: Cash flow = $15,000
• Year 5: Cash flow = $18,000 + Sale Price - Mortgage Owed = $18,000 + $720,000 - $487,218.98 = $250,781.02

Using these cash flows, you can calculate the IRR. The IRR is a percentage that represents the average annual rate of return you can expect from the investment. In this case, the expected IRR is approximately 7.02%.