ong teem investment decision, mou f$5.800 athe end of each of he nest 5 years Us

Question

ong teem investment decision, mou f$5.800 athe end of each of he nest 5 years Using the intenal rate of relum rg meto Problem Billy and Mandy Jones have $25,000 to IRR method Personal Finance invest On average, they do not make any investment thawill not returm at least 7 7% per year They have been approached with an vestment opportunity that requires $25,000 upont and has a payout of $5.800 a he rtemal rate of retun ORR) of his invechment opportureys»% Rund to owdeornal place , houkd lilly and Mandy undertake the investment (Select tom the drop down meus en hat the expected IRR their #oared mnnum iRF( of 7 7% the mestment is

Explanation / Answer

at 5% IRR, Cash Inflows=5800/(1+5/100) + 5800/((1+5/100)^2+5800/((1+5/100)^3+5800/((1+5/100)^4 + 5800/((1+5/100)^5=5800*3.54=20532

at 3% IRR, cash Inflows=5800/(1+3/100) + 5800/((1+3/100)^2+5800/((1+3/100)^3+5800/((1+3/100)^4 + 5800/((1+3/100)^5=5800*4.57=26506

IRR(through interpolation)=3%+(25000-20532)/(26506-20532)*2%=3+ 1.49%=4.49%

Billy and Mandy should not invest as return is 4.49% which is lower than their required return of 7.7%

If minimum IRR is 7.7%, mimimum investment should be=5800/(1+7.7/100) + 5800/((1+7.7/100)^2+5800/((1+7.7/100)^3+5800/((1+7.7/100)^4 + 5800/((1+7.7/100)^5=3.333*5800=19339.31.

Related Questions

Navigate

• Browse (All)
• Browse O
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.