# how could i get the discount factor when i calculate Cost of Debt?

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This topic contains 4 replies, has 5 voices, and was last updated by  oasis 1 year, 1 month ago. This post has been viewed 40 times

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• #53477

Participant

can anybody help me please that how could i get the discount factor when i calculate Cost of Debt? is it depend on guessing or whatever?

#100884

richieinspain
Participant

generally using 5% and 10% works in the majority of questions. If the interest rate is say 15% then maybe using 10% and 20% would be more appropriate. It doesn’t really matter which ones you use…as you still come back to the same value more or less. But do try and use a discount rate that will give a positive and then a negative PV.

I hope that helps

#100885

nenor
Participant

Definitely needs a negative, the IRR shortcut formula is basically weighted average between the two selected rates, with the weight going mostly towards the rate closest to zero NPV. If you choose rates with both positive NPVs you’re going to get a smaller denominator, and thus a larger term relating to the difference, further removing you from the correct number,

As always, matter of practice. Trying something 5% smaller / 5% larger than the nominal one usually works. If there are more periods, try a bit more even, it doesnt hurt to have a larger negative and larger positive NPV, the final value will still be close to the IRR.

#100887

khumo
Participant

This is the question i was also struggling with, then i thought maybe you would take the one closest to the negative and also the one closest to a positive. I think the 5% way makes much more sense to me. Thank you.

#100888

oasis
Member

In my opinion the best way to get IRR is to try discount factors, one at very low and one at very high so that any second try would not be required. For example 5% and 20% would be suitable in every case coz at most of cases 5% will give positive NPV and 20% will give negative NPV.

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