Using the tables provided, calculate or estimate the internal rates of return (IRR) that are the closest to those listed for the two projects. Present value of $1 to be received after N periods:
IRR IRR
Project A Project B

Question

Using the tables provided, calculate or estimate the internal rates of return (IRR) that are the closest to those listed for the two projects.  Present value of $1 to be received after N periods:
 IRR IRR
Project A Project B

Quizplus · Accepted Answer

For Project A, the closest IRR to 10.0% is for N=5, with a present value of $0.6209. For N=6, the present value is $0.5645. For N=7, the present value is $0.5147. We can estimate the IRR using linear interpolation between 10.0% and 11.5% as follows:

10.0% + (11.5% - 10.0%) x [(0.6209 - 0.5645)/(0.6209 - 0.5147)] 
= 10.91%

This is closer to 10.0% than to 11.5%, so we choose 10.0% as the closest IRR for Project A.

For Project B, the closest IRR to 12.0% is for N=3, with a present value of $0.8403. For N=4, the present value is $0.7364. For N=5, the present value is $0.6432. We can estimate the IRR using linear interpolation between 11.5% and 12.0% as follows:

11.5% + (12.0% - 11.5%) x [(0.6432 - 0.7364)/(0.6432 - 0.8403)] 
= 11.75%

This is closer to 12.0% than to 11.5%, so we choose 12.0% as the closest IRR for Project B.

Therefore, the best choice is C, with IRRs of 10.0% for Project A and 12.0% for Project B, respectively.

Using the Tables Provided, Calculate or Estimate the Internal Rates