n July of 2018, Taylor purchased 2,000 shares of XYZ common stock for $75,000. He then sold 1,000 shares of XYZ in July of 2019 for $39 per share.The remaining 1,000 shares were finally sold for $50 per share in July 2020.

a. Draw a cash-flow diagram of this situation.

b. What was Taylor’s internal rate of return (IRR) on this investment?

c. What was the ERR on this investment if the external reinvestment rate is 8% per year?

Question

n July of 2018, Taylor purchased 2,000 shares of XYZ common stock for $75,000. He then sold 1,000 shares of XYZ in July of 2019 for $39 per share.The remaining 1,000 shares were finally sold for $50 per share in July 2020.

a. Draw a cash-flow diagram of this situation. b. What was Taylor’s internal

rate of return (IRR) on this investment?

c. What was the ERR on this investment if the external reinvestment rate is 8% per year?

Accepted Answer

(a) The following cash-flow diagram summarizes the known information in this problem.

(b) $75,000 = $39,000 (P/F, [latex]\acute{i}[/latex]%, 1) + $50,000 (P/F, [latex]\acute{i}[/latex]%, 2), or [latex]\acute{i}[/latex] = 11.7% (IRR).

(c) $75,000 (F/P, [latex]\acute{i}[/latex]%, 2) = $39,000 (F/P, 8%, 1) + $50,000

$75,000 (F/P, [latex]\acute{i}[/latex]%, 2) = $92,120, so [latex]\acute{i}[/latex] = 10.8% (ERR)

Question 5.CC: n July of 2018, Taylor purchased 2,000 shares of XYZ common ...

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