Page 353 - F2 - MA Integrated Workbook STUDENT 2018-19

Capital budgeting

Example 3

A company has an NPV of $4,400 at a discount rate of 10% and an NPV of -
$31,000 at 20%. Calculate the IRR

You need to remember the rules of maths. Remove the brackets first, then
deal with and division or multiplication and finally addition and subtraction
(BODMAS)

IRR = 10 + [4,400 ÷ (4,400 – –31,000)] × (20 – 10)

IRR = 10 + (4,400 ÷ 35,400) × 10

IRR = 10 + 0.1243 × 10

IRR = 10 + 1.243 = 11.24%

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