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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
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%
Thank you Sir, it is clear now, I was confused, I thought the NPV falls minus $20.
You are welcome 🙂