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When we have calculated the NPV of a project which has cash flows in perpetuity,then while calculating the IRR we use thesame way as we do with normal projects right?
Cz in the bpp book they have done PV of cost=PV of benefits
So im getting a different answer cz i chose a higher dis rate to get a negative npv then put that into ur formula
Pls helpYou can calculate it by making two guesses – the normal way.
However if all the flows are in perpetuity then you can easily get the answer precisely without making two guesses.
For example, if the flows are
0 (100,000)
followed by 1 to infinity of 12,000 per annum,then the IRR is 12,000 / 100,000 = 12%.
(This is because to discount a perpetuity, we multiply by 1/r to get the PV. Since the NPV has to be zero, then 12000 x (1/r) must equal 100,000)This only works with a perpetuity.
Making two guesses will give a slightly different answer because the two guess approach only gives an approximation because the relationship is not linear.
(I don’t know what you mean about putting it into my formula – I don’t use a formula 🙂 )
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