PRC-2 · Chapter 6 · Question 25 of 45
When utilizing the linear interpolation formula to manually estimate the Internal Rate of Return (IRR), a financial analyst must calculate the NPV at two different discount rates. Ideally, these two NPVs should be:
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: D) One positive and one negative
Explanation
To accurately interpolate where the NPV crosses zero (the IRR), the analyst must bracket the rate by testing one discount rate that yields a positive NPV and a higher rate that yields a negative NPV.
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