By Hand(no excel): You conduct a Stock Project analysis over a period of 4 quart

Question

By Hand(no excel): You conduct a Stock Project analysis over a period of 4 quarters. You would invest $10,000 initially, earn dividends each quarter, and eventually sell your stock at the end of the year. An after-tax summary of the net cash flow is provided below.

Time Period(Quarters)     Net

0                      -$10,000

1                         $100

2                         $105

3                         $110

4                        $11,358

The Quarterly IRR for this investment is closest to what number below? Recall that one definition of IRR is the interest rate where the sum of the present worth of all of a project’s cash flows equals 0.

a) 3%

b) 3.5%

c) 4%

d) 4.5%

e) 5%

f) 5.5%

Explanation / Answer

e 5%

Quarters Cash Flows discount factor @10% Present value Cash Flow discount factor @5% Present value 1 100 0.909 90.9 100 0.962 96.2 2 105 0.826 86.73 105 0.925 97.125 3 110 0.751 82.61 110 0.889 97.79 4 11358 0.683 7757.514 11358 0.855 9711.09 8017.754 10002.205 10000 10000 -1982.246 2.205 IRR = L+H-R*A/A-B L LOWER RATE = 5+(10-5)*2/2+1982 H HIGHER RATE = 5.0 A NPV AT LOWER RATE B NPV AT HIGHER RATE

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