Question

Consider 2 loan opportunities where you receive payments today and at the end of the year, and repay the loan at the end of year 2: (15 points) Option A Option B Time Cash Flow A Time Cash Flow B Year 0 $2,500 Year 0 $1,800 Year 1 $3,500 Year 1 $1,600 Year 2 ($6,600) Year 2 ($3,600)

What are the IRRs of A and B?

Answer 1

Step-by-step explanation:

When we are talking about the Internal Rate of Return, It is a way of evaluating an investment’s rate of return. The term internal mean that the fact that the calculation does not involve external factors, such as inflation, the risk-free rate, the cost of capital or a variety of financial risks.

kindly check the diagram in the attached image to see the step by step solution to question A and B.

Answer 2

The IRR for:

Opportunity A: 6.92%

Opportunity B: 3.80%

Step-by-step explanation:

We have the IRR is the discount rate that brings the total cash flows of the project to zero.

Denote IRR of project A and project B as xa and xb

For project A:

2,500 + 3,500/(1+xa) + -6,600/(1+xa)^2 = 0 <=> 1 + xa = 1.0692 <=> xa = 6.92%.

For project B:

1,800 + 1,600/(1+xb) + -3,600/(1+xb)^2 = 0 <=> 1 + xb = 1.0380 <=> xb = 3.80%.

So, The IRR for Opportunity A: 6.92% ; Opportunity B: 3.80%.