The Gregor Corp. is considering making an investment of $100 million. It expects that at the end of two years, it will sell the investment for $121 million. There will be no other inflows or outflows. The internal rate of return on this investment would be
A) $21 million
B) $10.5 million per year
C) 0.21
D) 0.1

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 is the rate $r$ that satisfies the equation $100 = \frac{121}{(1 + r)^2}$. Solving for $r$ gives an IRR of 0.1, or 10%, not the absolute dollar amounts or the simple division of profit over years.