Question

You want to start an organic garlic farm. The farm costs $230,000, to be paid in full immediately. Year 1 cash inflow will be $25,000, after which the inflows are expected to grow at a 5% annual rate until the end of year 5 when you anticipate selling the farm for $260,000 (at the end of year 5 you get both the cash inflow from operations and from selling the farm). What is the IRR of your garlic farm investment? Round to the tenth of a percent (e.g. 5.6%=5.6). ​[Hint: You'll want to solve this in Excel using the IRR function or Goal Seek. Make sure the IRR cell is set to show decimals.]

Answer 1

13.8%

Step-by-step explanation:

IRR 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 in year 0 = $-230,000

Cash flow in year 1 = $25,000

Cash flow in year 2 = $25,000 x 1.05 = $26,250

Cash flow in year 3 = $26,250 × 1.05 = $27,562.50

Cash flow in year 4 = $27,562.50 × 1.05 = $28,940.63

Cash flow in year 5 = $28,940.63 × 1.05 = $30,387.66 + $260,000 = $290,387.66

Irr = 13.84%

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