Assume that an industrial building can be purchased for $1,500,000 today, is expected to yield cash flows of $80,000 for each of the next five years (with the cash flows occurring at the end of each year), and can be sold at the end of the fifth year for $1,625,000. Calculate the internal rate of return (IRR) for this transaction.
A) 3.14%
B) 6.78%
C) 9.20%
D) 10.37%

Question

Quizplus · Accepted Answer

The internal rate of return (IRR) is the discount rate that makes the net present value (NPV) of all cash flows from a particular project equal to zero. In this case, the IRR can be found by setting the NPV equation to zero and solving for the discount rate (r). The cash flows are $80,000 annually for five years, with an initial investment of $1,500,000 and a final sale price of $1,625,000 at the end of the fifth year. The IRR that satisfies these conditions is 6.78%, as it is the rate that equates the present value of the inflows to the initial investment. Calculating the exact IRR typically requires the use of financial calculators or software, as it involves solving for the root of a polynomial equation.

Assume That an Industrial Building Can Be Purchased for $1,500,000