Question

Assume that an industrial building can be purchased for $1,500,000 today, is expected to yield cash flows of $80,000 for each of the next five years (with the cash flows occurring at the end of each year), and can be sold at the end of the fifth year for $1,625,000. Calculate the internal rate of return (IRR) for this transaction

Answer 1

6.79%

Step-by-step explanation:

The IRR is the discount rate that equates the cost of a project to its after tax cash flows.

The IRR can be calculated using a financial calculator:

Cash flow for year 0 = -$1,500,000

Cash flow for year 1 to 4 = $80,000

Cash flow for year 5 = $1,625,000 + $80,000 = $1,705,000

IRR = 6 79%

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