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Dear John,
Regarding the IRR part of this question, I don’t understand why a rate lower than 8% is being used to calculate the IRR.
Thank you!
As always, you can use any two ‘guesses’ in order to calculate the IRR (although different guesses give slightly different answers due to the fact that the relationship is not linear, but you still get the marks if you did the arithmetic correctly).
Given that the first ‘guess’ was at 8% and gave a negative NPV, then for a NPV of zero the IRR must be lower than 8%.
(I am assuming that you are taking the paper based exam. If you are taking the exam on computer then as an alternative you can get the IRR precisely by using the IRR function on the spreadsheet suppled – either way is acceptable for the marks.)
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