If an investment requiring a \$20,000 initial investment is forecasted to produce income of \$3,000/year for 5 years & will be sold at the end of Year 5 for \$24,000, what is its projected IRR?

The answer is 17.81% and I understand how to get that number.

The second part of the answer states "The sale proceeds of \$24,000 > initial investment amount of \$20,000 which means the entire return of the initial investment (\$20,000) & part of the return on the investment (what return the investment gives us) comes from the sale proceeds of \$24,000. The annual cash flows contain only a partial return on the investment with the other part of return on investment in the sale proceeds of \$24,000 (the extra \$4,000). With this configuration of cash flows, part of the interest being earned each year is left in the investment, increasing the amount that earns interest each year at the rate of 17.81%."

Question: What does it mean by part of interest being earned each year is left in investment - why isn't it all of the interest being earned each year reinvested? Comparing this to if sold at end of Year 5 for \$20,000 (IRR is 15%) - if we don't get sale proceeds until the end and annual cash flow is the same in both examples, why would the IRR here be higher?

Region

#### WSO Elite Modeling Package

• 6 courses to mastery: Excel, Financial Statement, LBO, M&A, Valuation and DCF
• Elite instructors from top BB investment banks and private equity megafunds
• Includes Company DB + Video Library Access (1 year)