ACCA MA · Chapter 11 · Question 6 of 10
A project has an NPV of $10,950 at a discount rate of 10% and an NPV of $(5,850) at 18%. Using linear interpolation, what is the estimated internal rate of return (to one decimal place)?
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: A) 15.2%
Explanation
IRR = L + [NL / (NL - NH)] x (H - L) = 10% + [10,950 / (10,950 + 5,850)] x (18% - 10%) = 10% + (10,950 / 16,800) x 8% = 10% + 5.2% = 15.2%. Because the NPV at 18% is negative, the two NPVs are added in the denominator. 14.0% is simply the midpoint of the two rates.
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