Question

Suppose an industrial building can be purchased for $2,500,000 and is expected to yield cash flows of $180,000 in each of the next five years. (Note: assume payments are made at end of year.) If the building can be sold at the end of the fifth year for $2,800,000, calculate the IRR for this investment over the five-year holding period.

Answer 1

9.20%

Step-by-step explanation:

Internal rate of return is the discount rate that equates the after tax cash flows from an investment to the amount invested.

IRR can be calculated using a financial calculator

Cash flow for year zero = - $2,500,000

Cash flow each year from year one to four = $180,000

Cash flow in year five = $180,000 + $2,800,000 = $2,980,000

IRR = 9.20%

To find the IRR using a financial calacutor:

1. Input the cash flow values by pressing the CF button. After inputting the value, press enter and the arrow facing a downward direction.

2. After inputting all the cash flows, press the IRR button and then press the compute button.

I hope my answer helps you