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Hi sir, the cost of redeemable debt is = IRR right. So in order to calculate the IRR using the interpolation method, we would need a positive NPV and a negative NPV. Therefore , we have to trial and error.
For december 2014 question 5, to find the positive NPV i used a discount rate of 10% and to find the negative NPV i used a discount rate of 1% . But in the answer key, they used a discount rate of 5% to find the positive NPV and a discount rate of 4% to find the negative NPV.
Therefore my Cost of debt (IRR) value is different from the answer key. Will i be penalised since my answer is different from the answer key? So how do i know which is the exact discount rate to use ?
1. You do not need to have a positive and a negative (although having one positive and one negative will give a better approximation than two positives or two negatives).
2. As I explain in my lecture, the IRR is always only an approximation and if you use different guesses then you will end up with a different answer (because the relationship is not linear). Provided you have done your workings correctly (and they are clear to the marker) then you are not penalised for using different guesses. (But if your answer is more than 1% different, it is likely you have made a mistake somewhere).
If you are still not clear then please watch my lectures on IRR (and if necessary the F2 lectures on it as well, because it is revision of F2)
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