Can anyone provide me the formula for interpolation used in Capital Budgeting?
Thanks in advance.
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Interpolation Formula
Replies (4)
Quick Summary
IRR =Start rate+(NPV at start rate / NPV at start rate - NPV at end rate) X Difference between rate.
Hello
Here is the formula to calculate IRR
IRR = Lowest Discount Rate + [NPV at Lower rate * (Higher Rate - Lower Rate) / (NPV at Lower Rate - NPV at Higher Rate)]
For eg:- Say there are two discount rates for instance 10% & 20% and also let us say NPV at 10% is +29,150 and at 20% is -19,350. Then IRR would be as follows :
IRR = 10% + [ 29,150*(20%-10%)/(29,150+19,350)]
IRR = 16.01%
NOTE : - This formula is useful when there is unequal Cash Inflows.
Regards,
CA PCC Student - FA
When there is equal Cash Inflows :
(a) Long Life Project : -
When life is at least twice that of payback period.
Steps :
1. Calculate Payback Factor
2. Look into PV Tables
(b) Short Life Project: -
When life is less than the twice of payback period.
Steps:
1. Find two discount rates within which this value lies in the table.
IRR = Lower Discount Rate + [ (PV annuity Factor at Lower Rate - Payback Factor) / (PV annuity factor at Lower Rate - PV annuity Factor at Higher Rate)]
Payback Factor = Cash Outflow / Annual Cash Flow after tax
Thanks Mangesh and CA PCC.. for replying and clarifying.
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