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You are offered a chance to buy an asset for $7,250 that is expected to produce cash flows of $750 at the end of Year 1, $1,000 at the end of Year 2, $850 at the end of Year 3, and $6,250 at the end of Year 4. What rate of return would you earn if you bought this asset

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ijaz4308

Answer:

6.14%

Explanation:

The rate of return for the date given in the question for the asset shall be determined through calculating Internal rate of return on this asset, which shall be calculated as  follows:

Year          Cash flow               Present value@5%     Present value@10%

0               ($7,250)                  ($7,250)                      ($7,250)

1                 $750                       $714.29                      $681.82

2                $1,000                    $907.03                     $826.45

3                $850                       $734.26                     $638.62

4                 $6,250                    $5,141.89                   $4,268.83

                                                   $247.7                       ($834.28)

IRR=A%+[a/(a-b)*(B%-A%)]

A%=5%, a=$247.7 B%=10%  b=(834.28)

IRR=5%+[247.7/(247.7+834.28)*(10%-5%)]

IRR=6.14%

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