Question 1

A company is calculating the Internal Rate of Return (IRR) for a new machine. 
At a discount rate of 10%, the NPV is +$5,000.
At a discount rate of 15%, the NPV is -$2,000.

Using the interpolation formula, what is the approximate IRR?

Accepted Answer

Use the IRR interpolation formula: IRR = a + [ NPVa / (NPVa - NPVb) ] * (b - a), where 'a' is the lower rate and 'b' is the higher rate.

Question 2

What mistakes do candidates make on this ACCA question?

Accepted Answer

Subtracting the negative NPV incorrectly (e.g., 5000 - 2000 = 3000 instead of 5000 - (-2000) = 7000).

A company is calculating the Internal Rate of Return (IRR) for a new machine.
At a discount rate of 10%, the NPV is +$5,000.
At a discount rate of 15%, the NPV is -$2,000.

Using the interpolation formula, what is the approximate IRR?

How to approach this question

Full Answer

Common mistakes

Practice the full ACCA MA — Management Accounting Practice Exam 2

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