Assume that the net present value of a project is $74.3 million at 6%, and -$21.2 million at 9%. Use linear interpolation to compute the rate of return correct to the nearest hundredth of a percent.
A) 2.33%
B) 8.33%
C) 6.67%
D) 4.2%
E) 10.2%

Question

Quizplus · Accepted Answer

The rate of return can be found using linear interpolation between the two given points: (6%, $74.3 million) and (9%, -$21.2 million). The formula for linear interpolation is: rate = rate1 + (rate2 - rate1) * ((NPV - NPV1) / (NPV2 - NPV1)). Substituting the given values: rate = 6% + (9% - 6%) * (($0 - $74.3 million) / (-$21.2 million - $74.3 million)) = 6% + 3% * ($0 - $74.3 million) / (-$95.5 million) = 6% + 3% * 0.778 = 8.33%.

Assume That the Net Present Value of a Project Is