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An investor paid $73,000 for an investment property that yields $6,500 per annum with 2% per annum increases. Assuming a 5-year holding period and $115,000 reversion, what is the IRR? If a typical market participant would receive an 11% return on periodic cash flows, what would the adjusted rate of return be on this investment?

a. IRR is 16.61% and adjusted rate of return is 17.43%
b. IRR is 17.43% and adjusted rate of return is 16.61%
c. IRR is 17.09% and adjusted rate of return is 11.00%
d. IRR is 11.00% and adjusted rate of return is 17.09%

User Whiler
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1 Answer

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Final Answer:

An investor paid $73,000 for an investment property that yields $6,500 per annum with 2% per annum increases. Assuming a 5-year holding period and $115,000 reversion, what is the IRR, If a typical market participant would receive an 11% return on periodic cash flows, what would the adjusted rate of return be on this investment is b IRR is 17.43% and adjusted rate of return is 16.61%

Step-by-step explanation:

IRR Calculation: The Internal Rate of Return (IRR) is the discount rate that makes the net present value (NPV) of all cash flows from a particular project equal to zero. In this case, the IRR is calculated based on the initial investment, annual yields with increases, and the reversion value after 5 years.

Adjusted Rate of Return Calculation: The adjusted rate of return considers the market participant's typical return on periodic cash flows, which is 11% in this scenario. It adjusts the investment's return to align with the market norms.

Comparison: The correct option (b) states that the IRR is 17.43%, indicating the internal return on the investment. Simultaneously, the adjusted rate of return is 16.61%, which considers the market's typical return.

Relevance to Question: This aligns with the user's question about both the IRR and the adjusted rate of return.

User Shmichael
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