LO 4.3.1: Calculate the internal rate of return (IRR) for a given scenario. Flashcards
1
Q
When is the Internal rate of return (IRR) calculation used
A
- When calculating the compound return of unequal cash flows, or the PV of an asset
- IRR key — SHIFT CST key
- Examples on p. 156-158
2
Q
Compounding period
A
the period of time between two consecutive flows (e.g., semiannual is two periods per year)
3
Q
How are cash inflows input as
A
Positive numbers
4
Q
How are cash outflows input as
A
Negative numbers
5
Q
What must be entered for every compounding period that is a holding period for the investment
A
A cash flow of 0
6
Q
What is the first cash outflow (purchase of an investment) called
A
- Cash flow 0 (CF sub 0)
* Occurs at N = 0 on the timeline
7
Q
How do you enter consecutive equal cash flows
A
- Cash flow > CF sub j
* Multiplier > SHIFT > N sub j [the ninja key]
8
Q
How do you calculate IRR/YR on the calculator
A
- Enter all the cash flows
* SHIFT > IRR/YR (CST key)
