11. A three-year investment requires an initial outlay of £1,000. It is expected to provide three-year end cash flows of £200 plus a net salvage of £700 at the end of three years. Its internal rate of return (IRR) is closest to:
a) 10%
b)11%
c)20%
11. A three-year investment requires an initial outlay of £1,000. It is expected to provide three-year end cash flows of £200 plus a net salvage of £700 at the end of three years. Its internal rate of return (IRR) is closest to:
a) 10%
b)11%
c)20%
a) 10%
b)11%
c)20%
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To calculate the internal rate of return (IRR), we need to set up the equation as follows:
0 = -£1,000 + £200/(1+IRR) + £200/(1+IRR)^2 + (£200+£700)/(1+IRR)^3
Using a financial calculator or a spreadsheet program, we can solve for IRR.
Calculating the IRR, we find that it is approximately 20%.
Therefore, the closest option is:
c) 20%