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  1. avatar says

    Please can u assist me on this question.
    An investment has the following cash inflows and cash outflows:

    TIME CASH FLOW PER ANNUM
    0 (20,000)
    1-4 3000
    5-8 7000
    10 (10,000)

    What is the net present value of the investment at a discount rate of 8 %?

    • Profile photo of John Moffat says

      For the flow from 1-4, you simply multiply by the 4 year annuity discount factor at 8%.
      For the flow from 5 to 8, you need to subtract the 4 year annuity factor from the 8 year annuity factor – this will give you the factor for 5-8.
      For the 10,000 in 10 years time, you multiply by the ordinary 10 year discount factor.
      (You might find it more useful to watch the full lectures on this topic rather than the revision lectures :-)
      Also, please in future ask this sort of question in the Paper F2 Ask the ACCA Tutor Forum.)

  2. avatar says

    Sir, I have a difficulty in solving this question : –

    The following information relates to a two-year project.

    Initial investment $1 mil
    Cash inflow Year 1 $750,000
    Cash inflow Year 2 $500,000
    Cost of capital Year 1 is 10%
    Cost of capital Year 2 is 15%

    What is the net present value of the project (to the nearest $500)?

    (The answer is $77,000)

      • Profile photo of John Moffat says

        I am surprised that BPP do not show workings for the answer!

        All you need do is this:
        For the inflow at time 1, multiply the cash flow by the 1 year discount factor at 10%
        For the cash flow at time 2, multiply by the 1 year discount factor at 10% and then multiply by the 1 year discount factor at 15%. (This discounts 1 year at 10% and 1 year at 15%)

        Hope that helps :-)

      • avatar says

        Why do you times the Year 2 with two cost of capitals (10% & 15%)??
        Why can’t it just times with 15% as it mentions there cost of capital for Year 2?

      • Profile photo of John Moffat says

        Because the cost of capital is 10% for one year and 15% for the other year.

        Discounting at 15% for 2 years would only be correct if the cost of capital was 15% in both years.

        It might help you to watch my free lectures on discounting.

    • Profile photo of John Moffat says

      For individual flows use the present value tables. When there is an equal cash flow each year, then use the annuity table.

      (This is one of the revision lectures – have you watched the main lectures on this topic?)

    • Profile photo of John Moffat says

      The nominal annual interest rate is the actual rate of interest per annum, taking into account the effect of compounding.

      So if, for example, interest is charged at the rate of 5% every six months, then the nominal interest rate (the actual rate per year) is (1.05 x 1.05) – 1 = 0.1025 (or 10.25%)

    • Profile photo of John Moffat says

      @angelang, The lecture does explain it!

      For the payback period we are seeing how many years it will take to get back the original investment of 75000. After 2 years we have got a total of 50000 (20000 + 30000). So we need another 25000 (75000 – 50000). In the third year we get 50000 and so we will get 25000 in half the year. So total is 2.5 years.

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