Chapter 24, Problem 1PS

Summary Introduction

Adequate information:

Opening value of saving 1,48,000

Closing value of saving 1,98,000

To compute: Dollar weighted average return.

Introduction: Dollar weighted average return is a way to measure an investment’s performance. IRR is the rate where present value of inflow and present value of outflow are equal.

Explanation of Solution

Assuming that an investment was made for $148,000.

Thus, all the values in addition and investment in account are considered as outflow of cash flow and all the values of withdrawal and final value are considered as inflow of cash.

PV of inflow = PV of outflow

  $\frac{23000}{{(1+r)}^{15}}+\frac{198000}{{(1+r)}^{17}}\text{ = 148000+2500+}\frac{4000}{{(1+r)}^3}+\frac{1500}{{(1+r)}^7}+\frac{13460}{{(1+r)}^{12}}+\frac{3000}{{(1+r)}^{16}}$

IRR can be computed using the following formula in excel:

Following is the calculated answer using the above mentioned formula:

The above return has been calculated on monthly basis.

So, as per the question the dollar weighted average return between first and last date can be calculated by multiplying it by 17 (1/1/2016-5/3/2017)

  $\begin{array}{l} 1.6073\%\times 17\hfill \\ =27.32\%\hfill \end{array}$

Conclusion

Dollar weight average return is 27.32%