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?

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%)