An investment firm is selling a new product that will pay $100at the end of each of the next 20 years. If the new investment costs $1,246 to purchase, what is its internal rate of return (IRR)?

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 investment costs $1,246 and promises to pay $100 annually for 20 years. Using the formula for the present value of an annuity, we can calculate the IRR by finding the rate at which the present value of these future payments equals the cost of the investment. The correct answer is found through trial and error or financial calculator, and in this case, the IRR is approximately 5%.

An Investment Firm Is Selling a New Product That Will