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Internal Rate of Return

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA MA – FIA FMA › Internal Rate of Return

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  • January 2, 2022 at 4:47 pm #645199
    sarbrina
    Participant
    • Topics: 22
    • Replies: 49
    • ☆☆

    Hi Mr. John
    I find this question quite tricky. I understand the definition of IRR is the rate at which NPV is zero and I understand the calculation in this question but I do not arrive at zero if you know what I mean. Please be kind enough and explain this question to me detail.

    A machine has an investment cost of $60,000 at time 0. The present values (at time 0) of the expected net cash inflows from the machine over its useful life are:

    Discount rate Present value of cash inflows
    10% $64,600
    15% $58,200
    20% $52,100

    What is the internal rate of return (IRR) of the machine investment?

    A Below 10%
    B Between 10% and 15%
    C Between 15% and 20%
    D Over 20%

    January 3, 2022 at 8:20 am #645211
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 51537
    • ☆☆☆☆☆

    The NPV at 10% is +$4,600, at 15% is – $1,800 (and at 20% is – $7,900, but this is irrelevant),

    For an NPV of zero the IRR must therefore be somewhere between 10% and 15%.

    Have you watched my free lectures on this?

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