Asked by Tareq Hamad on May 21, 2024
Verified
Suppose you invest $100,000 in a new machine today, and you earn a $150,000 return in one year. What is the internal rate of return on this investment?
A) 10 percent
B) 25 percent
C) 50 percent
D) 100 percent
Internal Rate
A financial metric, often referred to as the internal rate of return (IRR), that calculates the profitability of potential investments.
Return
Total monetary flow of an asset as a fraction of its price.
Investment
The action or process of allocating resources, usually money, with the expectation of generating an income or profit.
- Understand the basics of investment decisions, including the calculation and interpretation of the internal rate of return (IRR).
Verified Answer
PP
Primrose PanesarMay 21, 2024
Final Answer :
C
Explanation :
The internal rate of return (IRR) is calculated by setting the net present value (NPV) of all cash flows from the investment equal to zero. In this case, the cash flow is a $100,000 investment followed by a $150,000 return. The IRR equation would be $100,000 = $150,000 / (1 + IRR), solving for IRR gives 0.5 or 50 percent.
Learning Objectives
- Understand the basics of investment decisions, including the calculation and interpretation of the internal rate of return (IRR).