Internal rate of return and present value of an investment

Problem

You are offered to purchase a property for $750. Projected end of year cash flows are as follows:

Date	Maintenance cost
1-1-2005	-$200
1-1-2006	$100
1-1-2007	$130
1-1-2008	$160
1-1-2009	$190

After five years you expect to sell the property for $1,000. What is the internal rate of return on this investment?

Solution

Set up the following cash flow or open the "Valuation - IRR" example in the Help examples folder.

Comment	Type	Occurs	Date	Amount	Occurrences	Change	Step
Acquisition	outflow	once	1-1-2004	750
Initial cost	outflow	once	1-1-2005	200
Income	inflow	annually	1-1-2006	150	4	30 (amount)	1
Sale	inflow	once	1-1-2009	1,000

Enter a value into the nominal annual rate field just to trigger a calculation.

Answer: The IRR results indicates that for this cash flow the internal rate of return is 12.5795 %. Control-click the IRR result to calculate using this value.

What if?

What price would you need to negotiate to get a rate of return of 15%?

Enter 15 as the nominal annual rate and change the acquisition event into an unknown:

Comment	Type	Occurs	Date	Amount	Occurrences	Change	Step
Acquisition	unknown	once	1-1-2004	1
Initial cost	outflow	once	1-1-2005	200
Income	inflow	annually	1-1-2006	150	4	30 (amount)	1
Sale	inflow	once	1-1-2009	1,000

Answer: You would need to purchase the property for $670.30 or less to get a return of at least 15 %.