The NPV of a project when discounted using a discount rate of 6% is positive $ 40,000. When the same project is discounted using a discount rate of 16% the NPV is negative $ 80,000. What is the IRR using linear interpolation A.5.33% B.11.00% C.9.33% D.0%

The NPV of a project when discounted using a discount rate of 6% is positive $ 40,000. When the same project is discounted using a discount rate of 16% the NPV is negative $ 80,000. What is the IRR using linear interpolation A.5.33% B.11.00% C.9.33% D.0%

Principles of Accounting Volume 2

19th Edition

ISBN:9781947172609

Author:OpenStax

Publisher:OpenStax

Chapter11: Capital Budgeting Decisions

Section: Chapter Questions

Problem 15EB: Project X costs $10,000 and will generate annual net cash inflows of $4,800 for five years. What is...

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Concept explainers

Present Value

Present value (PV) is defined as the current or present value of all future sums of cash flow or money at a specified rate of return. This rate of return is known as the discounted rate, which is essentially the interest rate, discounted over some time. The expected cash flows are discounted at a discount rate to compute the present value. The higher the discount rate, the higher the future value (FV), but the lower the present value.

Question

The NPV of a project when discounted using
a discount rate of 6% is positive $40,000.
When the same project is discounted using
a discount rate of 16% the NPV is negative
$80,000. What is the IRR using linear
interpolation?
O 5.33%
O 11.00%
O 9.33%
O 0.00%

Definition Definition Calculation used to evaluate the investment and financing decisions that involve cash flows occurring over multiple periods. NPV is calculated as the difference between the present value of cash inflow and cash outflow. NPV is used for capital budgeting and investment planning as well as to compare similar investment alternatives.

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