2. Compute the internal rate of return for each of the cash flows in problem 1.
Transcribed Image Text:### Investment Cash Flows Analysis
The table displays the cash flows for three different investments over a series of periods. Each investment involves an initial outlay followed by returns over five periods.
#### Cash Flow Table
| Investment | Period 0 | Period 1 | Period 2 | Period 3 | Period 4 | Period 5 |
|------------|----------|----------|----------|----------|----------|----------|
| A | $(1,000) | $100 | $100 | $100 | $100 | $1,100 |
| B | $(1,000) | $264 | $264 | $264 | $264 | $264 |
| C | $(1,000) | | | | | $1,611 |
#### Explanation:
- **Investment A** begins with an initial cost of $1,000. It provides a consistent return of $100 for the first four periods and a larger return of $1,100 in the fifth period.
- **Investment B** also starts with an initial expense of $1,000. It yields a uniform return of $264 every period from Period 1 to Period 5.
- **Investment C** has an initial investment of $1,000 without any returns until the fifth period, where it returns $1,611.
This table helps in comparing the different cash flow patterns and could assist in determining the best investment based on cash flow preferences and financial goals.
Definition Definition Net amount of cash that an entity receives and expends over the course of a given period. For a business to continue operating, positive cash flows are required, and they are also necessary to produce value for investors. Investors in particular prefer to see growing cash flows even after capital expenditures have been paid for (which is known as free cash flow).
Expert Solution
Step 1
IRR is an estimation of required rate of return that is compounded on a project or investment to show whether the investment is yielding a good amount of return or not. If the IRR is equal or greater than cost of capital then the company will accept the IRR or vice versa. It is beneficial for those companies where multiple cash investments take place.
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