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Using a dscount rate of 10% per year the net present value (NPV) of a project has been correctly
calculated as $50. If the discount rate is increased by 1% the NPV of the project fals by $20.
What is the interna rate of return (IRR) of the project?
A 7.5%
B 11.7%
C 12.5%
D 20.0%n this case, the lower rate(lr) is 10% and the higher rate is 11% (hr).
IRR =lr+ ((NPV at lr) / (NPV at lr – NPV at hr)) * (Diff hr – lr)
In this case, the lower rate is 10% and the higher rate is 11%. The NPV at the lower rate is $50 and the NPV at the higher rate is $50 – $20 = $30.
IRR = 10% + (($50) / ($50 – $30)) * (11% – 10%)
= 10% + (50 / 20) * 1%
= 10% + 2.5% = 12.5%
Therefore, the correct answer is C) 12.5%.
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