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.