Page 383 - Microsoft Word - 00 CIMA F1 Prelims STUDENT 2018.docx

Answers

Example 2.6

Answer = 11.11%

Cash Flows

Year 0 $96.00

Year 1 – 3 $12 (1 – 0.22) = $9.36

Year 3 $100.00

Discounting

Year Cash flow Disc factor Present Disc factor Present
@ 5% value @ 12% value

0 (96.00) 1 (96.00) 1 (96.00)

1 – 3 9.36 2.723 25.49 2.402 22.48

3 100 0.864 86.40 0.712 71.20

Total +15.89 –2.32

Cost of debt

15.89
IRR = 5% + × (12% – 5%) = 11.11%
(15.89 + 2.32)

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