Question

If you pay $800 for the right to receive $100 per year for 5 years with $1,000 lump sum in year 5, what rate did you earn?

Answer 1

	Nper	Number of years of annual cash flow	5
	Pmt	Amount of annual cash flow	$100
	Pv	Present Cash flow	($800)
	Fv	Lump sum future cash flow at end of year 5	$1,000
	RATE	Annual Interest Rate	16.13%	(Using RATE function of excel with Nper=5,Pmt=100,Pv=-800,Fv=1000)
		Rate Earned	16.13%
		This also can be solved using IRR function
			Year	Cash Flow
			0	($800)
			1	$100
			2	$100
			3	$100
			4	$100
			5	$1,100	(100+1000)
		Rate Earned=Internal Rate of Return	16.13%	(Using IRR Function over cash flow )
											E8 X V foc =RATE(E4, E5, E6, E7) E F G H K 4 Nper 5 Pmt 6 Pv 7 Fv 8 RATE Number of years of annual cash flow Amount of annual cash flow Present Cash flow Lump sum future cash flow at end of year 5 Annual Interest Rate $100 ($800) $1,000 16.13%! (Using RATE function of excel with Nper=5,Pmt=100, Pv=-800, Fv=1000) E18 : * for =IRR(F12:F17) E F G H I J K L 2 3 4 Nper 5 Pmt 6 Pv 7 FV 8 RATE Number of years of annual cash flow Amount of annual cash flow Present Cash flow Lump sum future cash flow at end of year 5 Annual Interest Rate Rate Earned This also can be solved using IRR function 5 $100 ($800) $1,000 16.13% 16.13% (Using RATE function of excel with Nper=5,Pmt=100, Pv=-800, Fv=1000) 0 Cash Flow ($800) 1 $100 2 $100 $100 $100 $1,100 (100+1000) 16.13%! (Using IRR Function over cash flow ) Rate Earned=internal Rate of Return