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Good evening,
I have spent some time trying to figure this out, have been on the ACCA platform but to no avail. I used =IRR and summed up the bottom section of each of the PV’s which add to 78,827.65 and I get 2% but the answer is around 18%. Not sure what I’m doing wrong? Thanks
Net cash flow -2,000,000.00 560,000.00 695,692.00 1,351,448.48 392,932.89
DF at 10% 1 0.909 0.826 0.751 0.683
Present values -2,000,000.00 509,040.00 574,641.59 1,014,937.81 268,373.17Net Present value 366,992.57
Net cash flow -2,000,000.00 560,000.00 695,692.00 1,351,448.00 392,933.00
DF at 20% 1 0.833 0.694 0.579 0.482
Present values -2,000,000.00 466,480.00 482,810.25 782,488.39 189,393.71Net Present value -78,827.65
The IRR is 10% + (366,992 / (366,992 + 78827) ) x 10%) = 18.23%.
Thinks about it – if the NPV at 10% is +’ve, then the IRR (which is when the NPV is zero) has to be a lot more than 10%.
I do suggest that you watch my free lectures on this. The lectures are a complete free course for Paper FM and cover everything needed to be able to pass the exam well.
In addition, although taking a ‘two-guess’ approach is OK for the exam (although as explained in my lectures, the answer will only ever be an approximation), do appreciate that in the exam you now have a spreadsheet available and one of the functions available is to calculate the IRR without having to spend time making two guesses. Links to the resources explaining the functions available are in the last chapter of our free lecture notes.
After reading your response I did IRR of the cash flows and got 18%, so I didn’t need to do the 20% guess after all.
Great, thanks so much!
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