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Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA MA – FIA FMA › internal rate of return (IRR)
hi ,
I have a question :
using an interest rate of 10% per year the NPV of project has been correctly calculated as 50$.if interest rate is increased by 1% the NPV of the project falls by 20$.
what is the IRR of the project?
the answer in rivision kit is :
=10% +((50$/50$-30$)*1%=12.5%.
and I get the wrong answer which is 11.7%, as I divide 50$ by 20$-50$;
my question is why they divided by 50-30 not 20-50 ??!
is it differ in some situations?
Thank you.
If the NPV is $50 and falls by $20, then it falls to $30.
The IRR has been calculated in exactly the same way as I calculate it in my free lectures – there are no different ways for different situations 🙂
To get from $50 to zero for the IRR, the NPV needs to fall by $50. Given that a fall of $20 is 1%, then a fall of $50 is 50/20 x 1% = 2.5%.
So the IRR is 10 + 2.5 = 2.5%
Do watch the lectures – they are a complete free course for Paper F2 and cover everything needed to be able to pass the exam well.