ICAEW BIP · Chapter 13 · Question 5 of 9
A project has an NPV of £9,222 at a discount rate of 10% and an NPV of -£9,216 at 15%. 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: D) 12.5%
Explanation
IRR = L + [NPV at L / (NPV at L - NPV at H)] x (H - L) = 10% + [9,222 / (9,222 + 9,216)] x 5% = 10% + (9,222 / 18,438) x 5% = 12.5%. The IRR lies between the two rates because the NPV changes from positive to negative. Since it is above the 10% cost of capital, the project is acceptable.
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