Final answer:
The IRR for the given cash flow scenario is 2%, as option (a) suggests. The cash flows are similar to a simple interest situation where the money doubles over 20 years at a 2% annual return.
Step-by-step explanation:
The question asks to calculate the internal rate of return (IRR) for a specific cash flow scenario. Assuming you put $100 in the bank and receive $2 every year for 19 years, with a final payment of $102 in the 20th year, the IRR is the rate at which the net present value (NPV) of these cash flows is zero. We can calculate this using a financial calculator or software designed for this purpose, but based on the pattern given in the question, the correct answer here is 2% (option a).
That's because the cash flows provided in the question mimic a simple interest scenario where the interest isn't compounded, but rather paid out. The total return over the 20 years is $2 times 19 years, plus $102 in the last year, which equals $200 ($38 from the yearly payments plus $162 in year 20), implying that the money has doubled over 20 years. A 2% return per year would also see $100 double over this period, fitting the rule of 72, which is a simplified formula to calculate the time needed to double the invested money at a given annual rate of return.