CA Foundation · Quantitative Aptitude · Mathematics of Finance
Sagar Enterprises invests ₹1,10,000 in a project that returns ₹1,21,000 at the end of 2 years, with no other cash flows. What is the internal rate of return (IRR) per annum, compounded annually?
The IRR solves 1,10,000 multiplied by (1+r) squared equals 1,21,000, so (1+r) squared is 1.1 and r is about 4.88%, close to 5%. Hence 5% is the nearest option, though not exact.
- A5%
- B10%Correct
- C11%
- D21%
Explanation
IRR is the rate r at which 1,21,000/(1+r)^2 = 1,10,000. So (1+r)^2 = 1.1, which is not a perfect square, so recheck: the rate must equal the discount rate giving NPV zero. 1,10,000 x (1.1)^2 = 1,33,100, not 1,21,000, so 10% is wrong; this question is flawed.
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