Answer :
The Internal Rate of Return (IRR) is a financial metric used to estimate the profitability of an investment. To find the Internal Rate of Return (IRR) for an investment where an investor lends $10,000 and receives $7,000 at the end of year 2.
The Internal Rate of Return (IRR) is a financial metric used to estimate the profitability of an investment. It represents the discount rate at which the present value of cash inflows equals the present value of cash outflows. In this case, the investor lends $10,000 (cash outflow) and receives $7,000 (cash inflow) at the end of year 2.
To calculate the IRR, we need to determine the discount rate that makes the net present value (NPV) of the cash flows equal to zero. In other words, we need to find the discount rate that equates the present value of $7,000 at the end of year 2 with the present value of the initial investment of $10,000.
Using a financial calculator or spreadsheet software, we can use the trial-and-error method or built-in functions to find the IRR. By adjusting the discount rate, we can determine the rate at which the NPV becomes zero. In this case, the IRR represents the annualized return on the investment that would make the present value of cash inflows equal to the initial investment of $10,000.
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