Question

Given the following expected cash flow stream, determine the IRR of the proposed investment in an income-producing property and determine whether or not the investment should be pursued using IRR as your decision-making criteria: investment horizon: five years; expected yearly cash flow in each of the next five years: $127,628; expected sale price at end of five years: $1,595,350; required return on equity: 5%; current market price of property: $1,750,000.

A. IRR is 5.72%; decision is to invest.
B. IRR is 4.92%; decision is to invest.
C. IRR is 4.92%; decision is to not invest.
D. IRR is 5.72%; decision is to not invest.

Answer 1

D

Step-by-step explanation:

The internal rate of return (IRR) on a proposed investment is the discount rate that makes the net present value of the investment is equal to zero.

But in this aspect, considering the internal rate of return, the net present value of the investment will not be equal to zero, and will be at the rate of 5.72%, and will result at loss when invested, in the next five years. Therefore, the best decision is not to invest.