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- March 31, 2022 at 1:39 pm #652418
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

March 31, 2022 at 2:39 pm #652426If 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%.

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