PDA

View Full Version : IRR,Internal rate of return


oksanaMBA
Oct 25, 2009, 11:56 PM
An investment of $210 produces a perpetual stream of cash inflows. Next year, the cash inflow will be $10.50, and the cash inflow will grow at 5% per year. What is the internal rate of return on this investment?

ArcSine
Oct 26, 2009, 05:58 AM
You can use the "constant-growth" model, appropriately rearranged, to solve for the internal yield r:

P_0 \ =\ \frac{d_1}{r-g}

... where P_0 denotes the asset's present value; d_1 is the expected cash flow one period away; and r and g are the asset's yield and cash-flow growth rate, respectively.