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IRR

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA MA – FIA FMA › IRR

  • This topic has 3 replies, 2 voices, and was last updated 11 years ago by John Moffat.
Viewing 4 posts - 1 through 4 (of 4 total)
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    Posts
  • March 7, 2014 at 10:35 am #161704
    Shafiq
    Member
    • Topics: 4
    • Replies: 6
    • ☆

    Dear Sir, Could you please help me undrestand the following question.

    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?

    The correct answer is 12.5%

    I am using your platform but it does not work..

    10+(50/70)*1

    March 7, 2014 at 12:47 pm #161714
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54757
    • ☆☆☆☆☆

    I don’t know why you have written 10 + (50/70)*1

    If the interest changes by 1%, then NPV changes by 20.
    Since at 10%, the NPV is 50, we need it to change by 50 to get an NPV of zero.

    So…..the IRR is 10 + (50/20)*1 = 12.5%

    March 7, 2014 at 1:03 pm #161716
    Shafiq
    Member
    • Topics: 4
    • Replies: 6
    • ☆

    Thank you Sir, it is clear now, I was confused, I thought the NPV falls minus $20.

    March 7, 2014 at 1:07 pm #161718
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54757
    • ☆☆☆☆☆

    You are welcome 🙂

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