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    Acook11's Avatar
    Acook11 Posts: 2, Reputation: 1
    New Member

    May 3, 2010, 10:48 PM
    How to solve for an implicit interest rate for a series of cash flows?
    Someone pays your $8000 for a 2-year structured settlement of $5000 each year for the next year and the year after that.

    So each cash flow would be
    (each is 1 year)
    CF 0 = $8000
    CF 1 = -$5000 (negative because you don't get it)
    CF 2 = -$5000 (negative as well because you don't get it)

    How do you solve for an implicit interest rate without using a finance calculator and solving for an IRR
    rehmanvohra's Avatar
    rehmanvohra Posts: 739, Reputation: 27
    Senior Member

    May 3, 2010, 11:26 PM

    I think you can use the math tables for ordinary or future annuity.
    ArcSine's Avatar
    ArcSine Posts: 969, Reputation: 106
    Senior Member

    May 4, 2010, 04:32 AM
    As a general "go-to" option, a set of tables as mentioned by Rehmanvohra can get you to a good approximation for most annuities, fairly efficiently.

    In a situation such as yours--with only two future cash flows--there's an algebraic approach which nails the precise answer, whether the CFs form an annuity or not.

    Note that finding the internal return amounts to finding that rate r which sets the NPV of the CF sequence to zero; i.e...

    Kinduva funny-looking way to set up a standard NPV format, but I did it that way intentionally, because if we let x fill in for [1 / (1+r)], it morphs to

    Now you've got a good ol' fashioned quadratic that you can solve for x using your weapon of choice (quadratic formula; completing the square). Don't forget to then solve for r, after having found x.

    Also keep in mind that one of the quadratic's roots may imply r < 0, which you can disregard as being not applicable to the physical situation at hand.
    Acook11's Avatar
    Acook11 Posts: 2, Reputation: 1
    New Member

    May 4, 2010, 08:24 AM

    Thanks a lot really appreciate it

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