IAI Actuarial Core Principles · Actuarial Mathematics for Modelling · Project appraisal
An investor pays Rs 10,000 now and receives Rs 5,500 at the end of year 1 and Rs 6,050 at the end of year 2. What is the internal rate of return, effective per annum?
The IRR is 10.00% per annum. At that rate the present values of the two receipts are Rs 5,000 each, which sum exactly to the Rs 10,000 outlay, so the equation of value balances and the NPV is zero.
- A15.50%
- B7.75%
- C10.00%Correct
- D5.50%
- 12.50%
Explanation
The IRR solves 10,000 = 5,500v + 6,050v^2. At i = 10%, 5,500/1.1 = 5,000 and 6,050/1.21 = 5,000, which sum to 10,000, so the NPV is zero. 15.50% is the total undiscounted gain divided by the outlay, which ignores timing. 7.75% is that figure halved.
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