You buy 1,000 shares of stock at $5.00 per share in January of 2004.You sell the stock at $7.50 per share in January of 2007.What is your IRR?
A)1)1447%
B)14.47%
C)18.00%
D)87.36%

Question

Quizplus · Accepted Answer

To calculate the IRR, we need to use the following formula:

NPV = -Initial Investment + (Cash Flow Year 1 / (1 + r) ^ 1) + (Cash Flow Year 2 / (1 + r) ^ 2) + (Cash Flow Year 3 / (1 + r) ^ 3)

Where:
NPV = Net Present Value
r = discount rate or IRR
Cash Flow Year 1 = cash inflow in year 1
Cash Flow Year 2 = cash inflow in year 2
Cash Flow Year 3 = cash inflow in year 3

Let's calculate the cash flows for this investment:

Initial Investment = 1,000 shares x $5.00 per share = $5,000
Cash Inflow Year 1 = 1,000 shares x ($7.50 - $5.00) per share = $2,500
Cash Inflow Year 2 = 0 (since we sold the stock in year 2)
Cash Inflow Year 3 = 0 (since we sold the stock in year 2)

Therefore, the NPV can be calculated as follows:

NPV = -$5,000 + ($2,500 / (1 + r) ^ 1) + (0 / (1 + r) ^ 2) + (0 / (1 + r) ^ 3)
NPV = -$5,000 + $2,500 / (1 + r)
NPV = $0

To find the IRR, we need to solve for r in the NPV equation. We can do this using trial and error or by using a financial calculator or spreadsheet software. The IRR is approximately 14.47%.

Therefore, the answer is B.

You Buy 1,000 Shares of Stock at $5