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IRR

Suresh Pai S (Tax Consultant) (1029 Points)

03 April 2017

What is the basis for selecting two discounting rates for finding IRR?

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7 Replies

shilpi (student) (780 Points)
Replied 03 April 2017

IRR of short term projects?

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Suresh Pai S (Tax Consultant) (1029 Points)
Replied 04 April 2017

I meant when there is unequal cash flow and there is a formula of interpolation. In that they are considering two discounting rates from air. I cannot understand the criteria for those discount rates.

Suresh Pai S (Tax Consultant) (1029 Points)
Replied 04 April 2017

Which edition are you using for fm? It is the first problem they have given for IRR in the study material?

ACMA M.Abdul Khaliq (CMA) (214 Points)
Replied 04 April 2017

At IRR project will break even

let us say suppose u discount at certain rate and find out some NPV +ve or -ve

try to to do trail and error process u will find upper and lower rates for discounting then fit in the formula to to find IRR

ACMA M.Abdul Khaliq (CMA) (214 Points)
Replied 04 April 2017

let us say example at 12% u get 1000 NPV its positive

try to increase rate now try 16% u may get -500 NPV

If this is the case ur IRR lies within 12 - 16%

shilpi (student) (780 Points)
Replied 05 April 2017

IRR by interpolation for short life projects(projects having life less than twice the payback period )and generating equal cash inflows.Step-1)cal.payback period 2)Find out PVAF within which the above payback lies.3)then we find two discount rate corresponding the above PVAF(one PVAF must be less than payback period and other one must be greater than payback period

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shilpi (student) (780 Points)
Replied 05 April 2017

And in case of projects generating unequal cash inflows

1)we calculate fake back period 2)find out two discount rate within which above fake payback period lies from annuity table 3)calculate NPV at both rate to have one negative NPV and one positive NPV.(trial and error approach)

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