This business/management problem is solved step by step below, with detailed explanations to help you understand the method and arrive at the correct answer.
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You're asking for a re-calculation of part (iv) from the first question. Here are the steps for calculating the Internal Rate of Return (IRR) using the interpolation method with 10% and 18% discount rates: iv. Calculate the Internal Rate of Return (IRR) using 10% and 18% discount rates and interpolation method. Given Data: Initial Investment (C_0) = Nle120,000 Cash Inflows (CF_t): Year 1: Nle25,000 Year 2: Nle30,000 Year 3: Nle28,000 Year 4: Nle35,000 Year 5: Nle32,000 + Nle15,000 (Scrap Value) = Nle47,000 Step 1: Calculate NPV at 10% (NPV_L). The formula for Present Value (PV) is PV = (CF_t)/((1+r)^t). PV Year 1: Nle25,000(1+0.10)^1 = Nle25,0001.10 = Nle22,727.27 PV Year 2: Nle30,000(1+0.10)^2 = Nle30,0001.21 = Nle24,793.39 PV Year 3: Nle28,000(1+0.10)^3 = Nle28,0001.331 = Nle21,036.60 PV Year 4: Nle35,000(1+0.10)^4 = Nle35,0001.4641 = Nle23,905.30 PV Year 5: Nle47,000(1+0.10)^5 = Nle47,0001.61051 = Nle29,183.18 Total PV of Inflows at 10% = Nle22,727.27 + Nle24,793.39 + Nle21,036.60 + Nle23,905.30 + Nle29,183.18 = Nle121,645.74 NPV_L = Total PV of Inflows - Initial Investment NPV_L = Nle121,645.74 - Nle120,000 = Nle1,645.74 Step 2: Calculate NPV at 18% (NPV_H). PV Year 1: Nle25,000(1+0.18)^1 = Nle25,0001.18 = Nle21,186.44 PV Year 2: Nle30,000(1+0.18)^2 = Nle30,0001.3924 = Nle21,545.63 PV Year 3: Nle28,000(1+0.18)^3 = Nle28,0001.643032 = Nle17,041.88 PV Year 4: Nle35,000(1+0.18)^4 = Nle35,0001.93887776 = Nle18,052.96 PV Year 5: Nle47,000(1+0.18)^5 = Nle47,0002.2878757568 = Nle20,544.60 Total PV of Inflows at 18% = Nle21,186.44 + Nle21,545.63 + Nle17,041.88 + Nle18,052.96 + Nle20,544.60 = Nle98,371.51 NPV_H = Total PV of Inflows - Initial Investment NPV_H = Nle98,371.51 - Nle120,000 = -Nle21,628.49 Step 3: Use the interpolation formula to find IRR. IRR = L + (NPV_L)/(NPV_L - NPV_H) (H - L) Where L = 0.10 (10%) and H = 0.18 (18%). IRR = 0.10 + Nle1,645.74Nle1,645.74 - (-Nle21,628.49) (0.18 - 0.10) IRR = 0.10 + Nle1,645.74Nle1,645.74 + Nle21,628.49 (0.08) IRR = 0.10 + Nle1,645.74Nle23,274.23 (0.08) IRR = 0.10 + 0.070719 × 0.08 IRR = 0.10 + 0.00565752 IRR = 0.10565752 ≈ 10.57\% 10.57\% 3 done, 2 left today. You're making progress.