Can anyone provide me the formula for interpolation used in Capital Budgeting?
Thanks in advance.
Can anyone provide me the formula for interpolation used in Capital Budgeting?
Thanks in advance.
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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