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Can you help me on question 2, where do 20% came from and how?
John Moffat says
I don’t think you watched the lectures before attempting the test!!
If you watch the lectures you will see that to calculate the IRR we need 2 ‘guesses’. We discount at 12% because that is the cost of capital, but the second guess can be anything. I chose 20% because obviously the IRR must be more than 12%.
You must watch the lectures first 🙂
But it should be 18% because in 18% NPV will be in negative it’s ok with 20% but 18% is nearest to the 12%
It doesn’t matter what rates you ‘guess’. The fact that 18% is nearest to 12% is of no relevance. Given that you have effectively only 2.4 minutes to do this in the exam, 20% is the most efficient second ‘guess’ to use given the four choices available for the answer.
Breezed through these revision Q’s. Thanks much.
I hve a prob with calculating payback period in a situation whr by u ar given scrap value, incremental cost,initial cost,additional cost
Please say which question in the test that you are referring to.
I have noticed a mistake in the second Question. The NPV is still positive for 20% rate, it means that the IRR should be higher than 20%. In accordance with my calculation, the IRR is 24%, not 18%, as it’s settled in the test. Thank you, Best regards, Tatiana
There is no mistake. The NPV at 20% is negative and the IRR is 18%.
The workings appear as a pop-up when you submit your answer.
Good day! Thank you very much for clarification.
You are welcome 🙂
good morning. kindly assist with the mock exam question I found. Able company new project details of which are attached. initial cost $300,000, expected life: 5 years, scrap $20,000, Additional revenue $20,000 per year, Incremental cost: $30,000 per year, Cost of capital 10% find NPV
You must ask this in the Ask the Tutor Forum, and not as a comment on the test for Chapter 23!
im refering to question 2
Hi, from where did the 20% comes from please I only see the 12% in the question.
It seems that you have not watched my lectures (and there is no point in attempting the tests without watching the lectures first).
You need two guesses in order to calculate the IRR. 20% is a guess – you could have used any rate you wanted.
Good morning, by using two guesses, we are comparing which rate will give us a quicker IRR between the two rates?
I don’t know what you mean by a ‘quicker’ IRR. We always have to calculate the NPV at two different rates in order to be able to calculate the IRR – that is the way we always do it, and the only way that we can do it.
You should watch the free lectures in order to understand.
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