- This topic has 6 replies, 2 voices, and was last updated 6 years ago by John Moffat.

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- January 6, 2017 at 12:02 pm #365312
In BBP Text, it is written

“The ARR is $409 x $2,000 = 20%. We take two-thirds of the ARR (approximately 14%) to find an initial estimate of the IRR. The initial estimate of the IRR that we shall try is therefore 14%.”

I don’t understand why to try discount rate with 2/3 of ARR.January 6, 2017 at 3:19 pm #365340I cannot comment without seeing the actual question, but in any normal situation it does not matter what guesses you use to be able to estimate the IRR and there is no logic at all in using the ARR as a basis for an estimate.

January 6, 2017 at 6:56 pm #365368This is the quiestion:

Find the IRR of the project given below and state whether the project should be accepted if the

company requires a minimum return of 17%.

Time $

0 Investment (4,000)

1 Receipts 1,200

2 ” 1,410

3 ” 1,875

4 ” 1,150January 8, 2017 at 4:45 am #365553I want to know how ARR can be used to estimate the discount rate of the project.

January 8, 2017 at 7:50 am #365559As I wrote before, there is no logic at all in using the ARR to estimate a discount rate.

You make two guesses – any guesses – and estimate the IRR in the normal way.

I do suggest you watch my lectures on this.

January 8, 2017 at 8:38 am #365564So why do we need to calculate the ARR first in this question? Can’t we calculate the IRR directly.

January 8, 2017 at 1:59 pm #365627We don’t need to calculate the ARR first. There is absolutely no point and no need.

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