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Hi John,
I am trying to solve one of the questions given in mock exam on this site.
Required 24,000 at time 0
Generates inflow of 5,000/year for 8 years (first inflow in 1 yrs time)
I need to calculate IRRMy calculations… (as in the question was not given d.f. I took 10% and 5% to calculate NPV)
0yr (24,000) x 1 = (24,000)
1-8yrs 5,000 x 5,335 = 26,675
1yr 5,000 x 0,909 = (4,545)NVP (10%) is (1,870)
0yr (24,000) x 1 = (24,000)
1-8yrs 5,000 x 6,463 = 32,315
1yr 5,000 x 0,952 = (4,760)NVP (5%) is (3,555)
10% – 5% = 5%
1,870 + 3,555 = 5,425IRR = a + ((NPVa/NPVa-NPVb) x (b-a))
IRR = 5% + ((3,555/5,425) x 5%) = 8.26%
And I am not even close to the answer (13%)
What am I doing wrong?
Thanks, Yana
I thank u supose to Use the redeemption value of 100 and discount it at 0.467 at 10% and at 15% (0.233). Your final IRR will give sum thing like 12.9% which when u round of it will give you 13%.
Just a try,frm Mac DTherefore: IRR=10+(2272/2272+1528) (15% – 10%)
Then : 10% + 2.989
Gives ,IRR of 13%Donald: Thanks for answering, but please do not answer in the Ask the Tutor Forum because you are not the tutor 🙂
Yana:
Since the first inflow is in 1 years time, the flows are 1 to 8.
To get the present value you simply multiply by the 8 year annuity factor. This discounts for 1 to 8 and you don’t need to then subtract 1 year as you have done.
So the present value at 10% is 26675 – 24000 = + 2675
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