ExpertMedium2 marksMultiple Choice
ACCA · Question 05 · Investment Appraisal
Section A
SolarGrid Municipal is evaluating a new solar farm project. At a discount rate of 10%, the project has a Net Present Value (NPV) of +$50,000. At a discount rate of 15%, the NPV is -$10,000.
Using the interpolation method, what is the estimated Internal Rate of Return (IRR) of the project?
Section A
SolarGrid Municipal is evaluating a new solar farm project. At a discount rate of 10%, the project has a Net Present Value (NPV) of +$50,000. At a discount rate of 15%, the NPV is -$10,000.
Using the interpolation method, what is the estimated Internal Rate of Return (IRR) of the project?
Answer options:
A.
13.33%
B.
14.17%
C.
14.50%
D.
15.83%
How to approach this question
Use the IRR interpolation formula: L + [NL / (NL - NH)] * (H - L), where L is the lower discount rate, H is the higher rate, NL is NPV at the lower rate, and NH is NPV at the higher rate.
Full Answer
B.14.17%✓ Correct
IRR = Lower Rate + [NPV at Lower Rate / (NPV at Lower Rate - NPV at Higher Rate)] × (Higher Rate - Lower Rate)
IRR = 10% + [50,000 / (50,000 - (-10,000))] × (15% - 10%)
IRR = 10% + [50,000 / 60,000] × 5%
IRR = 10% + 0.8333 × 5%
IRR = 10% + 4.166% = 14.17%
Common mistakes
Subtracting the negative NPV in the denominator instead of adding it (i.e., using 40,000 instead of 60,000).
Practice the full ACCA FM — Financial Management Practice Exam 5
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