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I came across this question online mock exam f2 & i know it looks soooo simple, but am really struggling hard for this question! i just can’t get the right answer 🙁 which is 12.5%
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?
20.0%
12.5%
7.5%
11.7%My workings : i used the IRR formula, L + NL/NL-NH * (H-L)
10 + 30/30-50 * (11-10)
and i also tried : 1+50/50-20 * (10-1) but i think its not correct
can anyone please help me ??
ThanksBecause you asked in the Ask the Tutor Forum, the ‘anyone’ is me (because I am the tutor for Paper F2 🙂 )
You really shouldn’t just learn IRR as a formula. If you watch our free lectures on this then you will understand the logic and then you do not need a formula!
At 10% the NPV is $50. For the IRR we need an NPV of zero.
If the NPV falls by $20 for every 1% interest, then because the need the NPV to fall by $50 then this is 50/20 = 2.5 times the 1% change.So the IRR must be 10% + (50/20 x 1%) = 12.5%
I really do suggest that you watch our free lectures. They are a complete course for Paper F2 and cover everything you need to be able to pass the exam well.
how do I calculate the IRR manually since I don’t have financial calculator? The question is 8% rate with $48000 cashflows for the period of 10 years.
If you are referring to the question above then you do not need any other method.
If you are asking about calculating the IRR in general then you do not use a financial calculator in Paper MA. You make two guesses and calculate it the way that I show in my free lecture on this.
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