Discussion
An outlay of 100 000 returning 20 000 a year in perpetuity has an internal rate of return of
Answer: B
Correct answer: 20 per cent
For a perpetuity the present worth is \( A/i \), so setting it equal to the outlay gives \[ i = \frac{A}{P} = \frac{20{,}000}{100{,}000} = 0.20. \] The absence of any terminal date makes this the simplest of all rate of return calculations, and it is a useful approximation for a very long-lived asset.
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