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hey guys hope that one of you can help me!!
(1) when calculating a normal IRR (investment appraisal), how do you obtain the 2nd DF factor to b able to calculate the IRR… I know if the npv is positive we use a bigger Df n if it is negative, we use a smaller DF but what I want to know has it got a fixed % that should b use or if the npv is positive we use any % which is bigger than the 1st one n if its negative we use any % which is smaller than the 1st one…. if one of u can illustrate this for me, I’ll b very grateful!(2) when calculating the cost of debt for the WACC, how do we obtain the df to discount the cash flows ( value of debt ,interest, redemption) … is it the % that is associated with the debentures cause nothing is given!!!
hey guys this IRR is eating a lot of my brain… its not difficult but I just want to make sure I’ve got everything right… so for the normal IRR how do we obtain the 2nd discount factor??…. and for the IRR concerning the cost of debt, how do we obtain the DF itself???
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Hey
1. For the second discount factor (or cost of capital) you usually use 2% more or less than the original DF given.
Say you are given a Df of 12% and it produces a +ve NPV then I would usually use 14% for the second NPV.
So in a nut shell you decide what DF to use.
I hope this is what you are after?
I’ve yet to get to the WACC – I’ll probably have some questions for you when I do!!!!
then I’ll answer it with a big smile!! it may true what u have said but some friends on the ACCA facebook page told me that there’s no fixed percentage… if u obtain a +ve npv, u should use a bigger DF to obtain a -ve npv (to make sure u obtain a -ve npv, u must use let say twice the 1st DF… so if its 10% n its give us a +ve npv, u use 20%)n then u compute the IRR…
quite an awkward situation I’m in… I ask 4 help n then I begin explaining it myself!!! but that’s what some chat-mates told me n I hope I’ve got it right…
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yes there is no fixed percentage..u use a smaller % when the npv is negative and vice versa for a positive npv..normally if u have a negative npv at a 10% df ull get a positive npv at 6% or at a factor lower then that depending on the amount of the negative npv
the same applies to cost of debt..remember it is not that % which is associated with the debt as u said..that is given to calculate the amount of interestYes, the second discounting amount is just a guesstimate based on the level of positive or negative NPV based on the first amount and the magnitude of the first discounting amount.
Hi there, Could I ask someone to help with question 47 in the bpp revision kit?
I’m on part b trying to work out the cost of the loan note,
set out the NPv Calc as normal, chose 10% df and it produced a negative npv
so I then chose a 5% df which also produced a negative npv
I’m very very stuck as to how to proceed from here, please help!@nadine1983 use 1% then… the thing is that we have to guess two DFs, one which will give us a positive npv & one which will give us a negative one… so why not choose 2 percentage which is completely different… as I’ve said try 1% DF, you’ll see the effect by yourself!!
hey there,
there are some techniques when i decide which rate to choose:
1.first you need to think you caculate IRR for doing what, to caculate the cost of loan,or convertible loan notes, theres always some hints in the question,e.g the loan note will redeem in 10 yrs at 10%,then the first DF you may choose is 10%2.dont choose for next DF before you caculate the NPV at 10%,
after the caculation, if the NPV is positive, then next DF should be more than 10%, usually we use 15%,if the NPV IS negative, then choose less than10%,usually 5%.3.there’s never a absolute fix rate you can choose in all the senario, try, and you should allow some margin of error. but the more close the rate you choose, then the less error.
hope i can help you~
i wii also take the F9 exam in DEC~
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