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    mlaursen's Avatar
    mlaursen Posts: 10, Reputation: 1
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    #1

    Jun 15, 2009, 11:27 AM
    Rate of Return-Annuity
    What is the rate of return on an investment of $10,606.00 if the company will receive 2,000.00 each year for the next 10 years?
    ArcSine's Avatar
    ArcSine Posts: 969, Reputation: 106
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    #2

    Jun 15, 2009, 01:22 PM
    With 10 cash flows and periods involved, there is no cookbook formula for computing the IRR on the investment. Trial-and-error is the only arrow in your quiver for this one, but fortunately nowadays we've got access to electronically souped-up T-n-E methodologies.

    Set up your standard PV-of-an-annuity formula (10 cash flows of 2K each). Now just keep playing with the discount rate in your formula until you hit upon the one that makes the PV of the CFs equal to the immediate cash outflow of 10,606. By monitoring the results of each pass, you can progressively close in on the answer with each successive iteration.

    Or, let Excel do the heavy lifting. Tell Excel your cash flows--including the immediate outlay--and its "IRR" function will rip through the T-n-E iterations in a jack flash, and (usually) return the correct answer.

    Give it a go, and best of luck!

    ...it was early and I was full of no coffee...
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