A corporation is considering the purchase of an interest in a real estate syndication at a price of $75,000. In return, the syndication promises to pay $1,000 at the end of each month for the next 25 years(300 months). If purchased, what is the expected internal rate of return, compounded monthly? How much total cash would be received on the investment? How much is profit and how much is return of capital?

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TomShelby TomShelby · Answer 1 · 2020-02-04T06:06:45+01:00

Answer:

IRR 1.50%

It will receive 300,000 dollars when:

250,000 is return of capital and 50,000 will be considered profit.

Explanation:

1,000 x 300 months = 300,000 dollars

The IRR will make the payment match the present value of the $250,000 principal

That will be the yield of the investment.

[tex]C \times \frac{1-(1+r)^{-time} }{rate} = PV\\[/tex]

C 1,000.00

time 300

rate 0.001251129 ( we solve for the rate using excel goal seek or a financial calcualtor

[tex]1000 \times \frac{1-(1+0.00125112927898874)^{-300} }{0.00125112927898874} = PV\\[/tex]

PV $250,000.0000

Now, as this are monthly payment we multiply by 12 to get the annual convertible rate:

0.001251129 x 12 = 0.015013551

rate = 1.50% per year