Final answer:
The internal rate of return is calculated by discounting the future cash flows to present value using an interest rate that equates the net present value of all cash flows to the investment's cost. In this scenario, we have cash flows of $15 million now, $20 million in one year, and $25 million in two years, which need to be discounted at an appropriate rate, which is suggested to be 15% for illustrative purposes.
Step-by-step explanation:
The question concerns the calculation of the internal rate of return (IRR) for an investment over a period of 15 years. To find the IRR, we must understand the concept of present value and how future cash flows must be discounted by an appropriate interest rate to determine their worth in today's dollars. The payments received from the firm are $15 million in present value, $20 million in one year, and $25 million in two years. A financial investor would need to select an interest rate that takes into account the opportunity cost of capital and a risk premium reflective of the investment's risk profile.
To evaluate these future payments at the present time, an investor may have decided on a 15% interest rate as an example. The present value of future cash flows can be calculated using the formula: Present Value = Future Value / (1 + Interest rate)number of years t. To calculate the IRR, one would adjust the interest rate until the net present value of all future cash flows equals the investment's initial cost. However, the summary provided does not contain all the necessary details to compute an exact IRR.