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19 January, 20:00

You are evaluating an investment that requires $1,000 upfront, and pays $100 at the end of each of the first 2 years, and an additional lump-sum of $5,000 at the end of year 2. What would happen to the IRR if the annual payments at the end of each of the first 2 years go up from $100 to $200?

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  1. 19 January, 21:51
    0
    Multiple Choice s

    IRR increases

    IRR decreases

    IRR remains constant

    The correct option is that IRR increases

    Explanation:

    The initial IRR would be calculated while also the increase in cash flow from $200 to $100 in the first two years would be incorporated into computing a second IRR using IRR formula in excel:

    =IRR (values)

    The values for first scenario are:

    Year cash flow

    0 - $1000

    1 $100

    2 $5,100

    IRR is 131%

    Second scenario:

    Year cash flow

    0 - $1000

    1 $200

    2 $5,200

    IRR is 138%

    IRR increases by 7% (138%-131%)
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