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Dear Sir,
1) If you have a debt which is redeemable at par, do you always judgmentally select any (reasonable) percentage to discount at?
2) Further, the following taken from the Sep-17 to Jun-18 BPP Revision Kit solution to question 213:
– DF 5% yields a NPV of (2.25) then DF 4% yields a NPV of 3.02 (neither of these discount rates were given in the initial question hence my initial question). The IRR was computed as (4+(3.02/(3.02-2.25))X1).
However, based on my understanding from your IRR lecture, the IRR is derived as (1st discount rate used (in this case 5%)+ NPV of first discount rate (in this case 2.25)/Change in NPV (add when there’s a neg & pos) X change in rate).
Could you please offer some clarity on this?
1. It does not matter whether the debt is redeemable at par or redeemable at a premium. In all cases you calculate the IRR by making 2 ‘guesses’.
2. I don’t understand your problem. You make any reasonable 2 guesses to calculate the IRR. If the NPV at the first guess is positive then your second guess will be at a higher rate. If the NPV at the first guess is negative (as it is here) then your second guess will be at a lower rate.
In either case the workings that follow are exactly the same.
(Just as when calculating the IRR for a project in both Paper FM and in Paper F2. If you are still unclear then have a look at the Paper F2 lectures ioan investment appraisal.)
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