Mr. Thompson is thinking of investing his money into a mutual fund. The return of the mutual fund varies as the stock market fluctuates. However, Mr. Thompson was told that the investment rate of return would be between 10% and 15%. If he invests $50,000 this year, most likely he will get $69,000 at the end of the fifth year. What is Mr. Thompsonís true internal rate of return? When is the break even point? Which is a better investment, this or Example 1-1?
[Answer: IRR=8.39%; NPV=
$9,392; FV=$10,911, Payback=4.72
Example 1-1 has higher Rate of Return (10.14%), faster Payback (4.50 years), but lower Net Present Value ($8,636).
In the Cash Flow worksheet, type in -50,000, 0, 0, 0, 69,000 from row 1 to row 5. Click row 1, keep on pressing left mouse button, drag down until row 5. You will see the IRR=8.39%. Next, enter 3.82 in the Discount Rate box. You will get NPV and FV.