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John Moffat.
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pinkyjovin123
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Hello sir
Please help me with the below question .
Using an interest rate of 10% per year the 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 IRR ??
Answer is 12.5%
TIA
John Moffat
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If the NPV at 10% is $50, then for the NPV to be zero it needs to fall by $50.
As explained in the lectures, we assume that the relationship between the NPV and the rate if interest is linear, and therefore if a fall of $20 in the NPV is an increase in interest of 1%, then a fall of $50 in the NPV will be an increase in interest of 50/20 x 1% = 2.5%.
pinkyjovin123
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