IRR Query
Hi there,
If you are told an entry yield of 5%, an exit yield of 7.5% and there is a 2-year holding period. What is the IRR for this investment?
Many thanks,
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Is this a real question you've come across? There isn't sufficient information to determine an accurate IRR, but there seems to be enough to determine it's a negative IRR. Simplifying it, your income p.a. is 1, your acquisition price is 20 (5% yield), and your exit price is 13.33 (7.5% yield, no change in income assumed).
Assuming no purchase / exit costs etc, your cashflows are -20, 1, 14.33, giving an IRR of c. -12.8%. Were you asked this in an interview? It strikes me as a question that would be asked to see if you can spot straightaway it's a poor investment. Even with calculator to hand, working out that IRR would be difficult.
How did you figure out that income pa is 1? Thank you!
It isn't, it's just an assumption to simplify the problem. x is your income, 1 replaces x to determine your cashflows, allowing you to determine your IRR.
Agree with MidMarketMcLovin - this sounds like a question to test understanding of return concepts. The higher exit yield would generally imply an unprofitable investment, therefore a negative IRR.
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