Cash-Flow Equivalence and IRR
Cash-flow equivalence compares alternatives by moving all cash flows to the same date. Internal rate of return is the interest rate that balances the cash-flow equation.
Cash-flow equivalence compares alternatives by moving all cash flows to the same date. Internal rate of return is the interest rate that balances the cash-flow equation.
A property costs $40,000 with 20% down and nine equal payments at 12%. The seller accepts 10% less for cash. Find the IRR of the seller financing offer.
Down payment is $8,000 and financed balance is $32,000. Cash price is $36,000, so the effective borrowed amount is $28,000 after the down payment.
Trial solution gives $i=15.66\%$, greater than 12%, so borrowing elsewhere and paying cash is better.
A firm borrows $30,000 for 2 years. The stated interest is 2% per year but the loan is repaid in 24 monthly installments of $1,550. What is the actual cost?
The monthly IRR is about $1.8\%$.
Final answer: actual annual cost is about $23.87\%$.
A $10,000 system can be paid using one of three options. At 10% compounded yearly, which option is best?
All options are equivalent at the end of year 4.
Final answer: all three options are economically equivalent.