Question

In international music festival that is scheduled for the next year will bring tourists and artists to this town. You plan to purchase a Pizza Store for $100,000. This investment project is expected to generate $112,000 in real free cash flow for the first year. After the festival, there will be no customers to your pizza parlor and no investors to acquire it. What is the IRR on this investment?

Answer 1

To calculate the IRR of the investment in the pizza store, we use a formula that sets the present value of future cash inflows equal to the cost of the investment. The initial investment is $100,000, with an expected return of $112,000 after one year. This returns an IRR of 12%.

Step-by-step explanation:

The Internal Rate of Return (IRR) is a financial metric used to assess the profitability of an investment. To calculate the IRR for an investment in a pizza store with an upfront cost of $100,000 and a single cash inflow of $112,000 after one year, we use the formula that equates the present value of cash inflows to the initial investment:

0 = -100,000 + 112,000 / (1 + IRR)

Here, $100,000 is the initial investment, and $112,000 is the expected cash inflow after one year. We need to solve for IRR, which gives us the breakeven rate where the net present value of cash flows equals zero. Through calculation, the IRR for this investment is found to be 12%, which represents the investment's efficiency or the expected return on investment.