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I came across this question online mock exam f2 & i know it looks soooo simple, but am really struggling hard for this question! i just can’t get the right answer 🙁 which is 12.5%
Using an interest rate of 10% per year the net present value (NPV) of a project has been correctly calculated as $50. If the interest rate is increased by 1% the NPV of the project falls by $20.
What is the internal rate of return of the project?
20.0%
12.5%
7.5%
11.7%My workings : i used the IRR formula, L + NL/NL-NH * (H-L)
10 + 30/30-50 * (11-10)
and i also tried : 1+50/50-20 * (10-1) but i think its not correct
can anyone please help me ??
ThanksBecause you asked in the Ask the Tutor Forum, the ‘anyone’ is me (because I am the tutor for Paper F2 🙂 )
You really shouldn’t just learn IRR as a formula. If you watch our free lectures on this then you will understand the logic and then you do not need a formula!
At 10% the NPV is $50. For the IRR we need an NPV of zero.
If the NPV falls by $20 for every 1% interest, then because the need the NPV to fall by $50 then this is 50/20 = 2.5 times the 1% change.So the IRR must be 10% + (50/20 x 1%) = 12.5%
I really do suggest that you watch our free lectures. They are a complete course for Paper F2 and cover everything you need to be able to pass the exam well.
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