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Mr A Chancer is thinking of investing $20,000 on 31 December 2013 to receive on repayment of $25,000 on 1 January 2016.
What is the IRR on his investment?Why are you attempting a question for which you do not have an answer? You must have an answer in the same book in which you found the question, and so in future please ask about whatever it is in the answer that you are not clear about – then I will explain.
As I explain in my lectures, the IRR is the rate of interest that makes the NPV of the cash flows equal to zero.
If the IRR is R, then the present value of the repayment (which is in 2 years time) is 25,000/(1+R)^2. For the NPV to be zero, this must be equal to 20,000.
Therefore 25,000/(1+R)^2 = 20,000.
You need now to solve this equation to get the value of R 🙂
Have you watched my free lectures on this? The lectures are a complete free course for Paper MA and cover everything needed to be able to pass the exam well.
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