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 (a. 9%.b. 11%.c. 3%.d. 5%.e. 7%.

Answer 1

Answer:

The  internal rate of return of this investment is d) 5%

Explanation:

Hi, in order to find the discount rate or the internal rate of return of this investment, you have 2 choices. First is to solve for "IRR" the following equation.

$Invesment=\frac{A((1+IRR)^{20}-1) }{IRR(1+IRR)^{20} }$

Where:

A= annuity (equal amount of money as a return, every year)

IRR= internal rate of return

therefore

$1,246=\frac{100((1+IRR)^{20}-1) }{IRR(1+IRR)^{20} }$

But this is too difficult to solve, so we have to use the second option, which is use the IRR function of MS Excel. Please see the attached document to check all calculations and the answer.

Best of luck.