burse.co June 2008

You calculate the IRR based on the what the investor is likely to do. They will be able to convert to shares in 6 years time or take cash in 8 years time - it is their choice and at present they will be expecting to convert to shares in 6 years time because that is better for them. I don't know what you are meaning by '7% and maybe 5%'. When calculating the IRR then, as always, you make two 'guesses' and then approximate. The examiner used 10% and 5%, but any two guesses would do (even though the answer will be slightly different due to the fact that the relationship is not linear). I really do suggest that you watch our free lectures on this.