You are evaluating an investment that requires $2,000 upfront, and pays $500 at the end of each of the first 2 years, and an additional lump-sum of $1000 at the end of year 2. What would happen to the IRR if the annual payment at the end of the first year go down from $500 to $300 and the annual payment at the end of second year stays at $500

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ewomazinoade ewomazinoade · Answer 1 · 2020-07-08T04:01:55+02:00

Answer:

The IRR decreases

Explanation:

The internal rate of return is the discount rate that equates the after tax cash flows from an investment to the amount invested.

To determine what happens to the IRR when year 1 Cash flow changes, we have to calculate the IRR in both scenarios.

IRR can be calculated using a financial calculator

IRR when year 1 cash flow in $500

Cash flow in year 0 = $-2000

Cash flow in year 1 = $500

Cash flow in year 2 = $500 + $1000 = $1500

IRR = 0

IRR when year 1 cash flow in $500

Cash flow in year 0 = $-2000

Cash flow in year 1 = $300

Cash flow in year 2 = $1500

IRR = -5.57%

The IRR decreases and turns negative

To find the IRR using a financial calacutor:

1. Input the cash flow values by pressing the CF button. After inputting the value, press enter and the arrow facing a downward direction.

2. After inputting all the cash flows, press the IRR button and then press the compute button.

I hope my answer helps you