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4b. (June 2008)
Question: Calculate the internal rate of return of the proposed investment in product P.
Please can someone tell me how they got the discount rate of 20% in this question.Thanks
To calculate the IRR, you calculate the NPV at two different discount rates and then approximate between them to estimate the rate at which the NPV is zero (i.e. the IRR).
You can use any two discount rates. They chose 20% as one of them, but you could have chosen any – there is nothing special about 20%.
(Note that if you use different rates for your estimate then you will get a slightly different figure for the IRR – it is only approximate because the relationship is not linear.)If this is still not clear then look at Chapter 7 of the OpenTuition Course Notes (and watch the lecture).
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