EOC R35.13

kuromusha

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the question asks us to find the discount rate that would result in the same NPV for both project, the solutions does not show how to find that discount rate, nor does the text. How exactly do we find the answer of 13.16%?
 
First: can you deduce the correct answer without knowing how to calculate the rate of 13.16%?
 
Through iteration.
I’m sure the book talks about “trial and error”, this is it.
 
S2000magician wrote:
First: can you deduce the correct answer without knowing how to calculate the rate of 13.16%?
Do you still have access to your CFAI material?
If not, the solution in the CFAI says the discount rate of 13.16, but does not explain how to calculate it, hence why I posted the question here.
 
Harrogath wrote:Through iteration.
I’m sure the book talks about “trial and error”, this is it.
There’s a clearer way to explain how to get the exact number, but it’s more important that the candidate know how to get the correct answer to the question, which does not require that you calculate the crossover rate.
 
kuromusha wrote:
S2000magician wrote:First: can you deduce the correct answer without knowing how to calculate the rate of 13.16%?
Do you still have access to your CFAI material?
If not, the solution in the CFAI says the discount rate of 13.16, but does not explain how to calculate it, hence why I posted the question here.
I have the 2016 curriculum sitting on my bookshelf, not six feet from me.
Now, please explain how to deduce the correct answer to the EOC question without knowing how to calculate 13.16%.
 
S2000magician wrote:
kuromusha wrote:
S2000magician wrote:First: can you deduce the correct answer without knowing how to calculate the rate of 13.16%?
Do you still have access to your CFAI material?
If not, the solution in the CFAI says the discount rate of 13.16, but does not explain how to calculate it, hence why I posted the question here.
I have the 2016 curriculum sitting on my bookshelf, not six feet from me.
Now, please explain how to deduce the correct answer to the EOC question without knowing how to calculate 13.16%.
Is this suppose to be a rhetoric question? I don’t know how to deduce the correct choice to the EOC.
 
Harrogath wrote:
Through iteration.
I’m sure the book talks about “trial and error”, this is it.
But we have financial calculator, we don’t need to trail and error to find the exact IRR.
The crossover rate is talked about in BB example 4 & 5, it doesn’t show us on how to find the crossover rate.
 
kuromusha wrote:
S2000magician wrote:
kuromusha wrote:
S2000magician wrote:First: can you deduce the correct answer without knowing how to calculate the rate of 13.16%?
Do you still have access to your CFAI material?
If not, the solution in the CFAI says the discount rate of 13.16, but does not explain how to calculate it, hence why I posted the question here.
I have the 2016 curriculum sitting on my bookshelf, not six feet from me.
Now, please explain how to deduce the correct answer to the EOC question without knowing how to calculate 13.16%.
Is this suppose to be a rhetoric question? I don’t know how to deduce the correct choice to the EOC.
It’s not rhetorical. The point of the my question is that you can answer the EOC question without knowing how to calculate the crossover rate. That’s also the point of the EOC question.
You need to think about this one. In particular, you need to think about the importance of the three intervals offered in the three answer choices.
 
kuromusha wrote:
Harrogath wrote:Through iteration.
I’m sure the book talks about “trial and error”, this is it.
But we have financial calculator, we don’t need to trail and error to find the exact IRR.
The crossover rate is talked about in BB example 4 & 5, it doesn’t show us on how to find the crossover rate.
The calculator uses trial and error (sophisticated trial and error, but trial and error nonetheless) to calculate an IRR.
 
S2000magician wrote:
The calculator uses trial and error (sophisticated trial and error, but trial and error nonetheless) to calculate an IRR.
Well, technically true, but for practical purposes, I would consider them to be *exact*. Trial and error as indicated in the material meant plugging the rates manually which would take forever.
 
kuromusha wrote:
S2000magician wrote:The calculator uses trial and error (sophisticated trial and error, but trial and error nonetheless) to calculate an IRR.
Well, technically true, but for practical purposes, I would consider them to be *exact*. Trial and error as indicated in the material meant plugging the rates manually which would take forever.
As in so many other areas, you’re straying off tangents.
Get back to the question: how do you solve this without calculating the crossover rate.
 
i’m thinking it over lunch, in the meantime I’m doing other EOC.
 
I think you’re a litte on the wrong path with this one. My approach (bear in mind I completed corp finance a few weeks back so memory isn’t perfect here) was something along the lines of:
A) We can immediately count this interval out, as we know that with a discount rate of 10% the NPVs are positive and not equivalent. Per the ‘trial and error’ methodology we need to raise the discount rate to lower the NPV, so choosing something between 0-10% is illogical.
C) I jumped to this one next as the lower bound of the interval was the upper bound of interval B, which meant that you could assess the two together. Plugging in a dicount rate of 15.02% (the lower bound of C) yielded a negative NPV for Project 2, meaning that the interval is too aggressive.
I chose B on this basis and got it correct, but did not bother calculating the 13.16% that you have cited. Would appreciate any comments from those more intelligible than I on my approach; would like to fix any errors in my method pre-exam!
 
studyguy18 wrote:I think you’re a litte on the wrong path with this one. My approach (bear in mind I completed corp finance a few weeks back so memory isn’t perfect here) was something along the lines of:
A) We can immediately count this interval out, as we know that with a discount rate of 10% the NPVs are positive and not equivalent. Per the ‘trial and error’ methodology we need to raise the discount rate to lower the NPV, so choosing something between 0-10% is illogical.
Although we can rule out the interval from 0.00% to 10.00%, this analysis is insufficient. For example, if they had given us an interval from 0.00% to 14.00%, both NPVs would still be positive and unequal, but the crossover rate would be in this interval.
Some more thinking is required here.
Try this: draw a graph of NPV vs. discount rate.
 
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