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You use any two interest rates you want. The IRR is only ever an approximation because the relationship is not linear, and you choose any two guesses you want (unless obviously the question specifies what rates to use).
I do suggest you watch the free lectures on this where it is all explained in detail. The lectures are a complete free course for Paper F9 and cover everything needed to be able to pass the exam well.
Thanks John for the reponse. I have watched the videos and I quite understand your points on DF for IRR. However, I have solved a couple of questions and I noticed that when I need to calculate the cost of debt for redeemable debts, I use DFs that are totally different from the solution and gives me a different value. What is your take on this for the examiner?
Unless the question specifies the interest rates to use, then it doesn’t matter.
The answer will be different (because the relationship is not linear), although if it is more than 1% different then it almost certainly means that you have made a mistake.
(Which highlights the importance of making sure your workings are neat and clear for the Section C questions – it is the workings that get the marks, not the final answer, but only (obviously) if the marker can follow them 🙂 )
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