ACCA FM · Chapter 6 · Question 4 of 10
A project has an NPV of +$18,400 at a discount rate of 10% and an NPV of -$6,200 at 15%. Using linear interpolation, what is the estimated internal rate of return?
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: C) 13.74%
Explanation
IRR = a + [NA / (NA - NB)] x (b - a) = 10% + [18,400 / (18,400 + 6,200)] x (15% - 10%) = 10% + (18,400 / 24,600) x 5% = 13.74% (2 decimal places). Subtracting the NPVs instead of adding their absolute values gives 17.54%, and using the wrong NPV in the numerator gives 11.26%.
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