You bought a racehorse that has had a winning streak for six years,bringing in $250,000 at the end of each year before dying of a heart attack.If you paid $1,155,720 for the horse 4 years ago,what was your annual return over this 4-year period?
A) 8%
B) 33%
C) 18%
D) 12%

Question

Quizplus · Accepted Answer

The annual return can be calculated using the formula for the internal rate of return (IRR) because this is essentially an investment problem where you want to find the rate of return that makes the net present value (NPV) of all cash flows (both positive and negative) equal to zero. Given the purchase price of the horse as a negative cash flow (-$1,155,720) at the start and the annual positive cash flows of $250,000 for four years, the IRR that satisfies these conditions is approximately 8%. This can be calculated using financial calculators or spreadsheet software by inputting these cash flows and solving for the IRR.

You Bought a Racehorse That Has Had a Winning Streak