An initial outlay of $10000 resulting in a free cash flow of $2000 at end of year 1, $5000 at end of year 2, and $ 8000 at end of year 3.
Determine the internal rate of return to the nearest percent ?
To determine the internal rate of return (IRR) to the nearest percent, you can use a financial calculator or a spreadsheet software, which have built-in functions to calculate IRR. I'll explain how to use the IRR function in a spreadsheet software like Microsoft Excel:
1. Enter the cash flows in a column. In this case, put the initial outlay of -$10000 (negative because it's an outgoing cash flow) in cell A1, $2000 in cell A2, $5000 in cell A3, and $8000 in cell A4.
2. In an empty cell, enter the IRR function. In this case, let's use cell B1.
- In Excel, the IRR function is written as "=IRR(range)".
- Select the range of cash flows you entered in step 1. In this case, it would be A1:A4.
- So, the formula in cell B1 would be "=IRR(A1:A4)".
3. Press Enter, and the IRR calculation should provide you with the internal rate of return to the nearest percent.
For the given cash flows, IRR will be approximately 18%.
Alternatively, you can use financial calculators or online IRR calculators by entering the cash flows and obtaining the IRR directly. Just make sure to select the appropriate options or settings for calculating the IRR with annual periods and discrete cash flows.