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IRR: PVIFA and Trial and Error Methods

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You would like to invest in one of the following assets. Use the present value of an annuity formula and the trial and error method to estimate the Internal Rate of Return or yield for each of the following two investments and decide which is the better investment.

A B
Initial Investment $8,500 $9,500

Income at Year End
Income: Year 1 $2,500 $2,000
Income: Year 2 $2,500 $2,500
Income: Year 3 $2,500 $3,000
Income: Year 4 $2,500 $3,500
Income: Year 5 $2,500 $4,000

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Solution Summary

The following solution involves calculating the Internal Rate of Return (IRR) using both the Present Value of an Annuity formula and the Trial and Error Formula. It also involves easy ways to find the Internal Rate of Return using the Present Value of an Annuity formula and a very quick version of the Trial and Error Formula.

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Find the solution and time value table attached.

FINANCIAL MANAGEMENT
CAPITAL BUDGETING
INTERNAL RATE OF RETURN (IRR) OR YIELD ON TWO INVESTMENTS

QUESTION:
You would like to invest in one of the following assets. Use the present value of an annuity formula and the trial and error method to estimate the Internal Rate of Return or yield for each of the following two investments and decide which is the better investment.

A B
Initial Investment $8,500 $9,500
Income at Year End
Income: Year 1 $2,500 $2,000
Income: Year 2 $2,500 $2,500
Income: Year 3 $2,500 $3,000
Income: Year 4 $2,500 $3,500
Income: Year 5 $2,500 $4,000

SOLUTION:
INVESTMENT A:
We ...

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