(Ignore income taxes in this problem.) An investment of P pounds now will yield cash inflows of £3,000 at the end of the first year and £2,000 at the end of the fourth year. If the internal rate of return for this investment is 20%, then the value of P is
A)£3,463.
B)£2,499.
C)£964.
D)£4,185.

Question

Quizplus · Accepted Answer

The internal rate of return (IRR) is the discount rate that makes the net present value (NPV) of an investment equal to zero. In this case, the NPV is given by:NPV = -P + 3,000/(1+0.20)^1 + 2,000/(1+0.20)^4Setting NPV = 0 and solving for P, we get:P = 3,000/(1+0.20)^1 + 2,000/(1+0.20)^4= 3,000/1.20 + 2,000/1.94= 2,500 + 1,031= £3,463Therefore, the value of P is £3,463.

(Ignore Income Taxes in This Problem