IAI Actuarial Core Principles · Actuarial Mathematics for Modelling · Project appraisal
A project costs ₹10,000 at time 0 and returns ₹5,500 at the end of year 1 and ₹6,050 at the end of year 2. What is the IRR (effective annual)?
The IRR is 10.00% effective per annum. Discounting 5,500 for one year and 6,050 for two years at 10% gives 5,000 each, totalling the 10,000 outlay, so the net present value is zero at that rate.
- A7.75%
- B9.00%
- C10.00%Correct
- D11.00%
- 15.50%
Explanation
At i = 10%: 5,500/1.1 = 5,000 and 6,050/1.21 = 5,000, total 10,000, so NPV = 0. The 7.75% option averages the simple profit (1,550/10,000 over 2 years) and ignores compounding. The 15.5% option is the total two-year return, not an annual rate.
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