Comments (5)

Mar 4, 2018

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.

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Mar 4, 2018

How did you figure out that income pa is 1? Thank you!

Mar 4, 2018

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.

Mar 4, 2018

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.

Mar 4, 2018
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