Discussion
A project's present worth is +800 at 12 per cent and -400 at 15 per cent. Interpolation puts its internal rate of return near
Answer: A
Correct answer: 14 per cent
Linear interpolation between the two points gives \[ i \approx 12 + 3 \times \frac{800}{800 + 400} = 12 + 2 = 14\ \mathrm{per\ cent}. \] The present worth function is convex rather than straight, so interpolation over a wide interval understates slightly; over three percentage points the error is small.
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