Assume that an initial investment is 100000 and that the est

Assume that an initial investment is $100,000 and that the estimated annual cash flows for the next 5 years are $25,000. What is the internal rate of return (IRR) for this investment?

5.56%

18%

1%

8%

a)		5.56%
b)		18%
c)		1%
d)		8%

Solution

PV factor for internal rate of return = Initial investment/Annual cash flows = 100000/25000 = 4 The PV factor of $ 1 annuity for 5 years is closest to 8% for 4 Internal rate of return (IRR) = 8% Option D is correct