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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?
sir im confused.
At 13% NPV should be –10
Using interpolation: 10% + (50/60)(13% – 10%) = 12·5%
how this?12.5% is correct.
Perhaps quicker is to say that we need the NPV to fall by $50.
$50 = 2.5 x $20, therefore the interest rate needs to increase by 2.5 x 1% = 2.5%
Therefore the IRR = 10 + 2.5 = 12.5%
I assume that you have watched my free lectures on the IRR? The lectures are a complete free course for Paper MA and cover everything needed to be able to pass the exam well.
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