Calculating the IRR using linear interpolation

The steps in linear interpolation are:

(1)Calculate two NPVs for the project at two different costs of capital
(2)Use the following formula to find the IRR:

where:
L = Lower rate of interest
H = Higher rate of interest
NL = NPV at lower rate of interest
NH = NPV at higher rate of interest.
The diagram below shows the IRR as estimated by the formula.

Decision rule:
• projects should be accepted if their IRR is greater than the cost of capital.
Example using IRR
A potential project's predicted cash flows give a NPVof $50,000 at a discount rate
of 10% and an NPV of $10,000 at a rate of 15%.
Calculate the IRR.
Solution:

The IRR = 14.17%