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I am studying how to use annuity factor to calculate IRR, the steps are 1: calculate cumulative discount factor with is also referred to as Annuity Factor = initial investment / annual inflow.
2: find the life of the project, n . 3: looking along the n year row of the cumulative DF until the closest value is found.
The third step is confusing me because I don’t know where to look for that relative row? Do I need to calculate it by myself or there is a table that I will be able to use?
For example find IRR of a project with initial investment of £50,000 the return are expected to be £10,000 each year of seven years cost of capital is 10%
I worked out the annuity is £50,000/10,000= 5
And the answer after it says using the table and life of seven years, the closest annuity factor to 5 is 5.033. this means the IRR is approximately 9%
The question is where the table is? In the exam does the question provide the table? Or do I need to calculate it by myself? If it is how to calculate it?
You are given both present value tables and annuity tables in the exam (and also a formula sheet). You can find what they look like at the beginning of our free lecture notes.