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Hi John,
How to I calculate the of even cash flows.
So example if the if the cash-flow is 12.75 for year 1,2,3,4,5 with a cost of capital at 8? what would be the IRR.
Thanks
Usually you would make two guesses as usual and approximate between them.
However, because it is an annuity, it is quicker and more accurate to calculate that the annuity factor is 80 / 12.75 = 6.275 and then to look along the 5 year row in the annuity tables to see which rate of interest gives the closest to 6.275
But, none of the interest rates in the tables give this, which would mean using the formula. However this would make it impossible for it to be asked in Paper F9.
The current cost of capital is completely irrelevant always when calculating the IRR.
I do suggest that you watch our free lectures – they are a complete course for Paper F9 and cover everything needed to be able to pass the exam well.
Download our free Study Guide and follow the links from there.
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