You invest $2,564.35 in a business, and in return you receive five uniform payments of $655.00 at the end of years 1 through 5. Solve for internal rate of return (IRR). Follow instructions in sequence requested below.
Do not solve this problem with Excel IRR function. Solve by hand calculation method and interest factor table values as shown on chapter 7 lectures slides example 7-15 (last slide in PowerPoint presentation)
Step 1. Create a cash flow table in Excel and the cash flow diagram graph representing this investment scenario.
Step 2. Write the theoretical equation you will use to set up and calculate the IRR of this investment scenario.
Step 3. Using the theoretical equation, write the interest factor notion version of the equation you will use to solve the problem.
Step 4. Solve for the IRR using the available interest factor tables. Guess interest rates that will bracket the actual IRR. (hint: start with 8%) You must show all algebraic steps for two solution attempts using interest rates that you guess that bracket the IRR.
Step 5. Show results in a 2 column by 3 row size table with interest rate guesses in column 1 and their matching calculated value / interest factor table value in column2 , with first guess in row 1 and second guess in row 3, and the IRR value in row 2 , showing that the two solution attempts bracket the unknown IRR.
Step 6. Then use linear interpolation to calculate the actual IRR and show all calculations.
Step 7. Now create a cash flow table in excel worksheet and solve problem with IRR function as a double check.