You are offered a chance to buy an asset for $4500 that is expected to produce cash flows of $750 at the end of Year 1, $1000 at the end of Year 2, $850 at the end of Year 3 and $6,250 at the end of year 4. What rate of return would you earn if you bought this asset.

Question

Business

Elena Carey

27 September, 12:59

You are offered a chance to buy an asset for $4500 that is expected to produce cash flows of $750 at the end of Year 1, $1000 at the end of Year 2, $850 at the end of Year 3 and $6,250 at the end of year 4. What rate of return would you earn if you bought this asset.

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Answers (1)

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Jesse Faulkner · Answer 1

22.64%

Explanation:

Given that

Buyed value of an asset = $4,500

Projected cash flows

For year 1 = $750

For year 2 = $1,000

For year 3 = $850

For year 4 = $6,250

So, the rate of return i. e internal rate of return is

We assume the internal rate of return be X%

$4,500 = $750 : (1.0x) + $1000 : (1.0x) ^2 + $850 : (1.0x) ^3 + $6,250 : (1.0x) ^4

After solving this, the rate of return is 22.64%