IAI Actuarial Core Principles · Business Finance · Cost of capital and evaluating investment projects
Project X costs ₹1,00,000 and returns ₹1,21,000 at the end of year 2 only. What is its IRR?
The IRR is 10% per annum. Growing ₹1,00,000 at 10% for two years gives ₹1,21,000, so the discount rate that sets NPV to zero is 10%. Dividing the total 21% gain by two gives only a simple-average approximation.
- A10%Correct
- B21%
- C11%
- D10.5%
- 12.1%
Explanation
Solve 1,00,000 = 1,21,000/(1+r)^2, so (1+r)^2 = 1.21 and 1+r = 1.10. IRR is 10%. The 21% figure ignores compounding over two years and 10.5% is a simple average of annual return.
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