IAI Actuarial Core Principles · Actuarial Mathematics for Modelling · Project appraisal
Meera invests ₹1,00,000 today in a project that returns a single payment of ₹1,21,000 exactly two years from now, with no other cashflows. What is the internal rate of return, effective annual?
The IRR is 10.00% effective annual. The equation of value 100,000(1+i)^2 = 121,000 gives (1+i)^2 = 1.21, so 1+i = 1.10. Dividing the 21% gain by two years gives a simple-interest figure, which is not an IRR.
- A10.00%Correct
- B10.50%
- C21.00%
- D5.00%
- 20.00%
Explanation
The equation of value is 100,000 (1+i)^2 = 121,000, so (1+i)^2 = 1.21 and i = 10%. The 10.50% option divides the total gain by 2 years (simple interest), ignoring compounding. The 21% option ignores the two-year timing.
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