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Hi John hope you are fine
i want to ask that what is Extrapolation and Interpolation? and what effect does it have on investment appraisal?
thanks
You will know from my free lectures that to calculate the IRR we guess at two different interest rates and approximate between them.
If for the two interest rates we end up with one positive NPV and one negative NPV, then the IRR is somewhere between the two rates – this is interpolation.
If however we end up with two positive (or two negative) NPV’s, then the IRR is outside of the two rates – this is extrapolation.
In both cases the IRR is only ever an approximation, but it is a better approximation if we have one positive and one negative NPV i.e. interpolation.
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