- This topic has 3 replies, 2 voices, and was last updated 10 years ago by
.
- Posts
life: 5 years
initial cost: 75,000
annual savings: 25,000
cost of capital: 15%what is the IRR?
———————————————since this is an annuity, i used the following:
AF=investment/cashflow=75k/25k=3
so i looked up the annuity table and found:
20% – 3.058
19% – 2.991so … IRR= 19 + (3-2.991)/(3.058-2.991) = 19.13
————————————————-
this is the wrong answer, and the correct answer is 19.9% and the text calculates npv for 15% and 20% and then computes the irr. the factors are 3.352 for 15% and 2.991 for 20%.
————————————————-– why do the 2 methods give different answers?
– why did he use the second method?
thanks in advance
Have you watched my lecture on this?
Because if you have you will know that using different guesses will give different answers – it is because the relationship is not linear and so using two guesses only ever gives an approximation to the IRR.
Your answer is not wrong (in fact it is actually more accurate than the answer in your book).
Because of the above, in the exam you will never be asked for a precise answer (unless you are specifically told which ‘quesses’ to use.
).ah..ok.. because the text did give 4 specific answers to choose from. and both methods r explained in the text as well.
am glad that the exam wont ask to choose from diiferent numbers..:)
i did see ur lecture. and the way u explained how to compute the irr beats every text. it was so intuitive that i dont have to memorize the formula 🙂
thank u
- You must be logged in to reply to this topic.