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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?At 10% the NPV is 50.
At 11% the NPV is 20.You can then calculate the IRR is the normal way.
I don’t know where you are studying from, but if you want to learn a formula for it then you can. As you will see in my lectures, I do not like having to learn a formula – you can get the same answer as a formula by simply ‘common-sense’ assuming the relation is linear.You should watch the free lecture on how to calculate the IRR from two ‘guesses’ – I cannot type out the whole lecture here.
(The answer is 11.67%)
No!
I think it silly to use an equation. If you understand what is happening then you do not need an equation. The exam will check whether or not you understand – not just whether you can learn an equation.
If you want an equation then you will have to look in your Study Text. Otherwise you should watch the lecture.
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