Question

Suppose you can purchase a piece of artwork today for $14,000 today. If you expect to sell it for $37,000 exactly 5 years from now, what is the internal rate of return (IRR) for purchasing the art? Enter your answer as a decimal and round to four decimal places. For example, if your answer is 4.55%, enter .0455.

Answer 1

The internal rate of return (IRR) for purchasing a piece of artwork for $14,000 and selling it for $37,000 after 5 years is approximately 0.2136 or 21.36%.

Step-by-step explanation:

To calculate the internal rate of return (IRR) for purchasing a piece of artwork for $14,000 and selling it for $37,000 after 5 years, we need to use the IRR formula, which is derived from the net present value (NPV) being zero.

The IRR is the rate at which the present value of future cash flows equals the initial investment. In this case, we're looking for the IRR that satisfies the equation $14,000 = $37,000 / (1 + IRR)5.

To solve for the IRR without a financial calculator or software that can handle the IRR function can be complex, requiring iterative methods or trial-and-error.

However, using a calculator with an IRR function or spreadsheet software, we find that the estimated IRR for this investment is approximately 0.2136 or 21.36%.

Investing in art with an expectation of selling it at a higher price and understanding the power of compound interest is similar to saving money early in life and benefiting from the growth over time due to interest compounding, as mentioned in the reference information.