ACCA Applied Knowledge · Management Accounting · Asset budgeting and investment appraisal
A project has an NPV of +$8,000 when discounted at 10% and an NPV of -$4,000 when discounted at 20%. Using linear interpolation, what is the approximate IRR?
The IRR is about 16.7%. Interpolating between 10% and 20%, the NPV falls from +8,000 to -4,000, so zero is reached two-thirds of the way across the 10-point gap: 10% + 8/12 × 10% = 16.7%.
- A16.7%Correct
- B15.0%
- C13.3%
- D18.0%
Explanation
IRR = 10% + [8,000 / (8,000 + 4,000)] × (20% - 10%) = 10% + 6.67% = 16.7%. Option 13.3% results from weighting by the wrong NPV (4,000/12,000), and 15% is just the midpoint of the two rates, ignoring the NPV sizes.
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