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CA Intermediate · Financial Management and Strategic Management · Investment Decisions

A project has an NPV of +₹10,000 when discounted at 10% and −₹5,000 when discounted at 15%. Using linear interpolation between these two rates, the approximate IRR of the project is:

The approximate IRR is 13.33%. By interpolation, the NPV falls from ₹10,000 to −₹5,000 across the 5 percentage points, so the zero point is two-thirds of the way from 10% to 15%. That gives 10% plus 3.33 percentage points.

  1. A13.33%Correct
  2. B12.50%
  3. C11.67%
  4. D15.00%

Explanation

IRR lies where NPV is zero. IRR = 10% + [10,000/(10,000+5,000)] × (15% − 10%) = 10% + 3.33% = 13.33%. The 12.50% figure assumes the zero point is the midpoint, and 11.67% uses the wrong weight (5,000/15,000).

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