Question

[13) Pingo plc has the following estimates of the net present value of a project using different interest rates: Discount rates 10% NPV 366 230 103 -76 0 0 15% Which pair of interest rates will provide the most accurate estimate if interpolation is used to estimate the project's internal rate of return? a) b) c) d) e) 8% and 10% 8% and 12% 10% and 12% 8% and 15% 12% and 15%

Answer 1

IRR is that discount rate at which NPV of the project is zero.

Based on the information above, we note that

• NPV decreases as discount rate increases
• At a discount rate of 12%, NPV is 103
• At a discount rate of 15%, NPV is -76

This means somewhere between the discount rate 12% to 15%, NPV turns zero. So, IRR can be best obtained by interpolating between discount rate of 12% and 15%. So the correct answer is option (e)