Question

Suppose you purchased an income producing property for $95,000 five years ago. In Year 1, you were able to negotiate a lease that paid $10,000 per year at the end of each year. If you are able to sell the property at the end of year 5 for $100,000 (after receiving our final lease payment), what was the internal rate of return (IRR) on this investment

Answer 1

The internal rate of return of this investment is 9.57%

Step-by-step explanation:

we already told that the property investment was $95000 initially then the the value of the property appreciated to $100000 in 5 years so we will use both these amounts to get what is the rate of return in this investment so we will use the future value formula :

Fv = Pv(1+i)^n

where Fv is the future value of the investment $100000+ $50000=$150000( we also considered the lease amount of $10000 per year for 5 years which is $50000)

Pv is the present value of the investment $95000

IRR is the internal rate of return for the investment which we will calculate

n is the period of 5 years in which the investment was done in

therefore we will substitute the above mentioned values to the formula also mentioned above and solve for IRR:

150000= 95000(1+IRR)^5 then we divide by 95000 both sides

150000/95000= (1+IRR)^5 then we get the 5th root of both sides

1.095654258 = 1+ IRR then we subtract 1 from both sides

0.095654258 = IRR then we multiply by 100 for a percentage

9.57% = IRR which this is the internal rate of return for the investment. rounded off to two decimal places.