Question

An investment firm is selling a new product that will pay $100at the end of each of the next 20 years. If the new investment costs $1,246 to purchase, what is its internal rate of return (IRR)? 11% 7% 3% 9% 5%

Answer 1

Answer:

The correct answer is 5%

Explanation:

We use excel or a spreadsheet to calculate this ratio.  See document attached.

We use a cash flow to solve this problem.  

At moment 0 we have the investment cost ,  in this case $1,246. From period 1 to period 20,  we have incomes o benefits of  $100. Then, we calculate the Net cash flow that is  the difference between benefits and cost.

We use all the result (positive and negative) in Net cash flow row to get the IRR.