Compute the rate of return for the investment represented by the following cash flow: 1.83% 18.12% 21.14% 4.35%YearCash Flow0-$5951+2502+2003+1504+1005+ 50 Solution Note: Assuming rate of return as Internal Rate of Return. Internal Rate of return of an investment/project is that rate at which net present value becomes zero of that investment/ptoject\'s cash flows. The formula for IRR is: 0 = P0 + P1/(1+IRR) + P2/(1+IRR)2 + P3/(1+IRR)3 + . . . +Pn/(1+IRR)n where P0, P1, . . . Pn equals the cash flows in periods 1, 2, . . . n, respectively; and IRR equals the project\'s internal rate of return. Lets first put 18.12% as irr Hence, 0 = -595 + 211.64 + 143.34 + 91.01 + 51.36 + 21.74 = -75.87 Thus irr should be less than 18.112%. Putting IRR as 4.35% 0 = -595 + 680.01 = 85.01 Again irr is not 4.35% as npv is not equal to zero at 4.35 %. Thus it should be more than 4.35% but less than 18.12% (which is not given in option). At 10.81% irr, npv is approximately zero. Hence irr is 10.8%.

1. Compute the rate of return for the investment represented by the following cash flow:
1.83%
18.12%
21.14%
4.35%YearCash Flow0-$5951+2502+2003+1504+1005+ 50
Solution
Note: Assuming rate of return as Internal Rate of Return.
Internal Rate of return of an investment/project is that rate at which net present value becomes
zero of that investment/ptoject's cash flows.
The formula for IRR is:
0 = P0 + P1/(1+IRR) + P2/(1+IRR)2 + P3/(1+IRR)3 + . . . +Pn/(1+IRR)n
where P0, P1, . . . Pn equals the cash flows in periods 1, 2, . . . n, respectively; and
IRR equals the project's internal rate of return.
Lets first put 18.12% as irr
Hence,
0 = -595 + 211.64 + 143.34 + 91.01 + 51.36 + 21.74 = -75.87
Thus irr should be less than 18.112%.
Putting IRR as 4.35%
0 = -595 + 680.01 = 85.01
Again irr is not 4.35% as npv is not equal to zero at 4.35 %.
Thus it should be more than 4.35% but less than 18.12% (which is not given in option).
At 10.81% irr, npv is approximately zero. Hence irr is 10.8%