Mila purchased an investment for $1,000. It generated the following stream of cash flows. $$\begin{array} { | l | l | }
\hline \text { End of year 1 } & \$ 500 \
\hline \text { End of year } 2 & \$ 400 \
\hline \text { End of year 3 } & \$ 300 \
\hline
\end{array}$$ Her internal rate of return was
A) 10.65%.
B) 6.67%
C) 9.70%
D) 8.90%.

Question

Mila purchased an investment for $1,000. It generated the following stream of cash flows. $$\begin{array} { | l | l | } 
\hline \text { End of year 1 } & \$ 500 \
\hline \text { End of year } 2 & \$ 400 \
\hline \text { End of year 3 } & \$ 300 \
\hline
\end{array}$$ Her internal rate of return was
A) 10.65%.
B) 6.67%
C) 9.70%
D) 8.90%.

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 solving the equation $0 = -1000 + \frac{500}{(1+r)} + \frac{400}{(1+r)^2} + \frac{300}{(1+r)^3}$ for $r$, where $r$ is the internal rate of return. The correct answer, 10.65%, is the rate that satisfies this equation, indicating that Mila's investment's returns equate to an annual rate of 10.65%.

Mila Purchased an Investment for $1,000 Her Internal Rate of Return Was A) 10

Mila Purchased an Investment for $1,000 Her Internal Rate of Return Was
A) 10