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When dealing with IRR, is it always the scenario where we’ll have to literally guess the percentage prior to calculating it? Like for instance, we are given a question in the exam whereby we are only given the cost of capital per annum, along with the total value of the project, its duration and the cash flows based on the duration the project would last. Are we still supposed to be guessing the percentage to calculate the IRR or is there a way to get through this problem?
You always need to make two guesses and approximate, unless there are equal cash flows each year.
If there are equal cash flows in perpetuity, then the IRR can be calculated precisely as the cash flow divided by the initial investment.
If they are equal cash flows for a fixed number of years, then you can calculate the annuity factor by dividing the initial investment. by the equal cash flow, and then looking in the annuity tables to find which rate of interest has that annuity factor.
Ok I got it when working with IRR where the cash flows are equal, but what if the cash flows are not equal? Do we have to still do the same thing?
Read the first line of my previous answer!!!!
If there are not equal cash flows then you will need to make two guesses.
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