An investment is expected to produce the following annual year-end cash flows: Year 1: $5,000 Year 2: $1,000 Year 3: $0 Year 4: $5,000 Year 5: $6000 Year 6: $863.65 The investment will cost $13,000 today. What will be the IRR (compounded annually) on this investment?

The IRR (compounded annually) on this investment is 10%.

Explanation:

The formula to compute IRR on this investment:

/begin{aligned} &NPV = / frac {CF_0}{ (1 + r) ^0} + / frac {CF_1}{ (1 + r) ^1} + / frac {CF_2}{ (1 + r) ^2} + / frac {CF_3}{ (1 + r) ^3}/ / / end{aligned}NPV = (1+r) 0CF0 + (1+r) 1CF1 + (1+r) 2CF2 + (1+r) 3CF3

 13000 = 0 + 5000 (1 + r) 1+1000 (1 + r) 2+0 (1 + r) 3+5000 (1 + r) 4+6000 (1 + r) 5+863.65 (1 + r) 6

Solve the equation using calculator:

 r = 10%