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Solutions

(1) The pay back period is 3.214 (Rs 36,000/Rs 11,200) . .

(2) According to Table A-4. discount factors closest to 3.214 for 5 years are 3.274 (16 per Catt rate”b r interest) and 3.199 (17 per cent rate of interest). The actual value of IRR which lies between 16 per cent and 17 per cent can, now. be determined using Equations 10.11 and 10.12

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Instead of using the direct method, we may find the actual IRR by applying the interpolation formula to the present values of cash ‘inflows and outflows (Equation 10.12). Here. again. it is immaterial whether we start with the lower or the higher rate.

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