CIMA BA2 · Chapter 12 · Question 4 of 13
A project costs $120,000 now and will generate cash inflows of $40,000 a year for 4 years, starting in one year's time. At a 10% discount rate the 4-year annuity factor is 3.170, giving an NPV of $6,800. At 15% the 4-year annuity factor is 2.855. Using linear interpolation, what is the internal rate of return, to one decimal place?
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: B) 12.7%
Explanation
NPV at 15% = ($40,000 x 2.855) - $120,000 = $114,200 - $120,000 = -$5,800. IRR = 10% + [6,800 / (6,800 + 5,800)] x (15% - 10%) = 10% + (6,800 / 12,600) x 5% = 12.7% (to one decimal place).
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