Question

Internal Rate of Return IRR Trying to find the interest rate i* for which Net Present...

Internal Rate of Return IRR

Trying to find the interest rate i* for which Net Present Worth NPW = 0.

We know that the rate is between 7% and 8%.

i (NPW)
7 891.0
i* 0
8 -272.8

Using interpolation to find the actual value, we get the interpolation equation:

(891.0 - 0.0) / (i* - 7)

= {891.0 - (-272.8)} / (8-7)

From this, we get i* = 7.76%

Please explain this for me, how it arrives at 7.76?

My algebra is not good. All I come up with is 1163.80 / (-1163.80) = -1

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Homework Answers

Answer #1

At i = 7 %, NPW = 891

At i = 8%, NPW = -272.8

Using interpolation, (simple representation)

i = 7 + [(891-0)/(891-(-272.8)]*(8-7)

= 7 + [891/(891+272.8)]*1

= 7 + 891/1163.8

= 7 + 0.765595

= 7.76%

Equation given in question will reduece to the value given above,

Solving equation given in ques

(891.0 - 0.0) / (i - 7) = {891.0 - (-272.8)} / (8-7)

891 / (i - 7) = {891.0 + 272.8)} / (8-7)

891 / (i - 7) = 1163.8 / 1

891 / (i - 7) = 1163.8

(i - 7) = 891/1163.8

(i - 7) = 0.765595

i = 7+0.765595

i = 7.76%

Pls comment if you require further explanation

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