Could you please explain why we are using discount rate of 14% and 20% to calculate the IRR, while using 5% and 20% is incorrect because with using 5% and 20% the IRR is 18.0% which is incorrect; the answer is A.
An investment project has net present values as follows:
At a discount rate of 5% $69,700 positive
At a discount rate of 14% $16,000 positive
At a discount rate of 20% $10,500 negative
Using the above figures, what is the BEST approximation of the internal rate of return of the investment project?
A 17.6%
B 17.9%
C 18.0%
D 22.7%
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IRR
7y ago#1It is because the question asks for the best approximation.
As you will know from my free lectures, the relationship between the NPV and the rate of interest is not linear. Therefore the closer together the two guesses are, then the better will be the approximation.
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