Internal Rate of Return Calculation
Course: Fundamentals of Financial Planning
Lesson 5b: Using the HP 10bII Calculator
Student Question:
In Example 2, the solution given has 6 years (including CF0) instead of 5. I believe the first year of Carl’s coin purchase should be CF0, but the fifth year – which includes a purchase and a sale – should be CF4. This would make it 5 years altogether instead of 6. Can you please explain? Thanks!
EXAMPLE 2
Carl buys antique coins almost every year on his birthday. His first investment of $1,000 was five years ago. He subsequently invested $1,500 in the second year and $1,750 in year three. He made no investment in the fourth year. In the fifth year, he invested $1,250 and then sold the coins for $8,300. What is Carl’s IRR?
Instructor Response:
Great to hear from you. This is certainly a weird one. But here’s why it appears there are 6 years instead of 5. Cf0 and Cf1 are both in the same year. Cf0 stands for the original cash flow (which in this case was the $1,000 original investment), and then Cf1 would be any other cash flows in that year. So, for example, if in the first year he bought $1,000 of coins, and then 6 months later made another purchase of $500, then Cf1 would be $500.
A bit confusing, no doubt. Let me know any other questions!
