Perpetuity IRR Question investment, required, return, button

whew1110

If the investment is purchased for $25,000 and will pay $5,000 per you in a perpetuity and the required rate or return is 15%, what is the money-weighted return?

I know how to do the formula, 5,000/25,000=20%

but, how do i do it on my BA2 Plus? I hit CF, then type in 25,000, +/- button, enter button, down button, type 5,000, enter button, then what do i do from here? Thanks for any help you guys can give.

ajpheif16

Use the cash flow function, enter the payment, and then enter 999 periods. It's not technically a perpetuity, but the rounding is too small for it to matter.

Maddin

Rather than just lear the "trick", here's the intuition behind the problem:

The IRR is the discount rate that results in an NPV of zero. So, since the cash inflows are a perpetuity,

NPV = -25,000 + 5,000/i

set NPV to zero and solve for i: 0 = 5.000/- - 25,000 ==> i=0.20

pacmandefense

ok, thanks for the clarification on that.