To compute the internal rate of return (IRR), we need to use a financial calculator or software, as it involves solving for the discount rate that equates the present value of cash inflows (900,000) with the initial investment (-500,000) over the given time period (3 years).
Using a financial calculator or software, we can input the following cash flow information:
- Year 0: -500,000 (initial investment)
- Year 3: 900,000 (cash inflow)
Using this data, the IRR can be determined. Assuming a discount rate of 10%, the present value of the cash inflow (900,000) at the end of 3 years would be:
900,000 / (1 + 0.10)^3 = 900,000 / 1.331 = 674,591.72
To equate this value with the initial investment, we solve for the discount rate:
-500,000 + 674,591.72 = 0
By using trial and error or using financial software, we find that the discount rate that solves this equation is approximately 18.91%. Therefore, the internal rate of return (IRR) for this investment is approximately 18.91%.
Invest 500000 today and get 900000 at the end of 3rd year. Compute internal rate of return :
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