Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA MA – FIA FMA › IRR calculation

- This topic has 1 reply, 2 voices, and was last updated 9 months ago by John Moffat.

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- April 11, 2022 at 12:18 am #653035
Hello Sir,

I just did following question from mock paper with given NPV at 5% and i guessed 10% of NPV as my second.

Though i got an answer close to 16%

Yet answer sheet gives option B.Will it be a problem if i just tick 16% in such case while sitting in exam?

Field is considering a new project. Details of the proposed project are as follows:

Life of project: 6 years

Initial cost: $85,000

Annual savings: $24,000

NPV at 5%: £36,824

What is the internal rate of return for this project to the nearest 1%?

A 16%

B 18%

C 20%

D 22%Thank you in advance

April 11, 2022 at 8:08 am #653051Yes it will be a problem and you would lose the marks.

The answer when making two guesses is always only an approximation, and your choice of 10% as the second guess makes it too approximate – you know from the choice of answers available that the IRR was definitely a lot more than 10%.

You should have looked at the choices of answers available, and chosen 20% as the second guess. If the NPV had been zero or positive then you would know the correct answer immediately. If the NPV had been negative (as it is here) then you would end up with a much better approximation.

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