Present Value Factor for Reversion of $1 Period 6% 7% 8% 9% 10% 1 .943396 .93457
ID: 2637735 • Letter: P
Question
Present Value Factor for Reversion of $1
Period
6%
7%
8%
9%
10%
1
.943396
.934579
.925926
.917431
.909091
2
.889996
.873439
.857339
.841680
.826446
3
.839619
.816298
.793832
.772183
.751315
4
.792094
.762895
.713503
.708425
.683013
5
.747258
.712986
.680583
.644931
.620921
6
.704961
.666643
.630170
.596267
.564474
Using only the information in the table above, what would the IRR be for an investment that cost $500 in period 0 and was sold for $750 in period 5?
(A) Between 6% and 7%
(B) Between 7% and 8%
(C) Between 8% and 9%
(D) Between 9% and 10%
Period
6%
7%
8%
9%
10%
1
.943396
.934579
.925926
.917431
.909091
2
.889996
.873439
.857339
.841680
.826446
3
.839619
.816298
.793832
.772183
.751315
4
.792094
.762895
.713503
.708425
.683013
5
.747258
.712986
.680583
.644931
.620921
6
.704961
.666643
.630170
.596267
.564474
Explanation / Answer
An IRR (Internal Rate of Return) is the rate which makes the NPV (Net Present Value) = ZERO.
The formula to calculate IRR is: 0 = P0 + P1/(1+IRR) + P2/(1+IRR)2 + P3/(1+IRR)3 + . . . +Pn/(1+IRR)n where P0 = Initial cash outflow
And P1, . . . Pn equals the cash inflows in periods 1, 2, . . . n, respectively.
Solving for IRR, we have = 8.45%, so the correct answer is option C.
I hope my solution solves your query.
Regards.