You are offered a chance to buy an asset for $5,250 that is expected to produce cash flows of $750 at the end of Year 1,$1,000 at the end of Year 2,$850 at the end of Year 3,and $6,250 at the end of Year 4.What rate of return would you earn if you bought this asset?
A) 15.56%
B) 16.75%
C) 18.61%
D) 16.91%
E) 13.36%

Question

Quizplus · Accepted Answer

The rate of return can be calculated using the Net Present Value (NPV) formula set to zero, where the NPV equals the sum of the present values of all cash flows, including the initial investment. The correct rate of return is the one that makes the NPV equal to zero. By testing the given options or using financial calculator functions or software that solves for the internal rate of return (IRR), we find that option D, 16.91%, is the rate that accurately reflects the return on the investment given the cash flows and initial investment amount.

You Are Offered a Chance to Buy an Asset for $5,250