Question

Investment in an equipment project yields a net present worth of (–$150) at 15% interest rate and $95 at 20% interest rate. Calculate the internal rate of return on this investment.

Answer 1

18.067%

Step-by-step explanation:

Let , i = 15% , then NPV = -$150 ,

When i = 20%, NPV = $95 A

At IRR , let the NPV = 0

Now, using the linear interpolation method we get

20% - 15%/ IRR -15 = 95-(-150) / 0-(-150)

20% - 15%/ IRR -15 = 245 / 150

5 / IRR -15 = 1.63

1/IRR -15 = 0.326

1/0.326 = IRR - 15

3.067 = IRR -15

IRR = 3.067+ 15

IRR = 18.067%