- Account market value on 1/1/10 is $237,000
- Dividends of $8,000 are paid on 7/1/10. These dividends are not reinvested (which means they are withdrawn from the account rather than remaining in the account).
- Contribution of $40,000 is made on 10/1/10
- Account market value is $329,000 on 12/31/10. There was also a dividend of $8,000 paid on this day that was not reinvested.
In order to do this calculation, you need to determine the intervals at which cash flows will be entered into the calculator. I am going to use quarterly cash flows. Here is the information to be entered into the calculator:
CF(0) = -237,000 (this is the starting value of $237,000)
CF(1) = 0 (no cash flow occurs on 4/1)
F(1) = 1 (the cash flow of zero occurs once)
CF(2)= 8,000 (the withdrawn income of $8,000 on 7/1)
F(2)=1 (this cash flow occurs once)
CF(3)= -40,000 (the contribution of $40,000 on 10/1/10)
F(3)=1 (this cash flow occurs once)
CF(4)= 337,000 (combination of ending market value of $329,000 and the withdrawn income of $8,000)
F(4)=1 (this cash flow occurs just once)
This should give you an IRR of 6.378%. This is a quarterly number, and the exercise wants an annual return. Thus, you should do the following steps to convert the quarterly return to a annual return:
- add 1 to 6.378%
- raise 1.06378 to the 4th power (as there are four quarters in a year)
- subtract 1
- multiply by 100 to create the percentage
Having said all of that - stay tuned - on Wednesday I will show what many candidates may find to be a faster way of solving this particular problem.