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Hello,
I was just curious with questions where you are trying to find the cost of loan notes for example and use the irr, is there any rule of thumb for which discount rates to try out for use in the IRR calculation? It’s just I’m worried in the exam I might spend a lot of time trying out different discount rates before finding which one puts the NPV below zero. Would it be a problem if I just picked a high discount rate to make it likely that it puts it below zero?
Thanks,
AlexAs I explain in my free lectures, it doesn’t matter what 2 ‘guesses’ use to calculate the IRR, except that the further away the two guess are then the worst will be the approximation (and the answer is, of course, always an approximation anyway).
I always make my first ‘guess’ at 5% is there is tax involved, or 10% if there is no tax involved. The depending I make a second guess at a higher or lower rate of interest depending on whether the first NPV is positive or negative.
It is not necessary to have one positive and one negative NPV (even though that would give a better approximation) as again I explain in my lectures you can still estimate the IRR and still get the marks.
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