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 Acook11 Posts: 2, Reputation: 1 New Member #1 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 Posts: 739, Reputation: 27 Senior Member #2 May 3, 2010, 11:26 PM I think you can use the math tables for ordinary or future annuity.  ArcSine Posts: 969, Reputation: 106 Senior Member #3 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... $0\ =\ -5,000\left(\frac{1}{1+r}\right)^2\ -\ 5,000\left(\frac{1}{1+r}\right)\ +\ 8,000$ 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 $-5,000x^2\ -\ 5,000x\ +\ 8,000\ =\ 0$ 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 Posts: 2, Reputation: 1 New Member #4 May 4, 2010, 08:24 AM Thanks a lot really appreciate it Not your question?  Question Tools Search this Question Search this Question: Advanced Search ### Add your answer here. ## Check out some similar questions! There is an opportunity to invest in a 2 year project with cash flows of$100,000 in year one and $200,000 in year two. The required rate of return is 20% and the question wants to know the maximum amount you should be willing to initially invest The answer is$222,100 but I can't figure out how...

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