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hello John
hope you are well
i have one quick question regarding IRR calculations in exams.
Q4b – June 2012. do we need to assume and try a rate in exam to get negative npv in order to calculate IRR?
in this question the cost of capital is 12.75% which gives a positive npv
but we do then need to assume through trail and error to find a cost of capital which would give us negative npv in exams?
here if i try 28% and anything above 30% can give me negative npv
please help
thanks
Ideally, your second rate to try should give a negative NPV (because this will give a better approximation to the IRR – the IRR is always only an approximation).
However if you get two negative NPV’s then you can still approximate to the IRR.(Here, because the NPV is so high at 12.75%, and because the figures for Zeta are so high, it would be sensible to try a pretty high second guess 🙂
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