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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
Yes 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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