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Erica 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)

Erica says

Please Sir.. i do not know how to work this question out in proper steps. Oh and by the way, I got this question from BPP. I look forward for your reply.

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

Erica 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?

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.

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Amna Zaman says

Hi..Please tell me when calculating NPV how will I know whether to use annuity table or NPv for the cost? What hint will be there in the question? I’m much confused please tell me. Thanks

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?)

Shehvar says

Thank you soooooooooo much sir. May I ask numeric Q to you related to other topics of F2? thank you once again…….

John Moffat says

No problem (but ask in the ‘ask the tutor’ forum.

Shehvar says

sir please tell me about the nominal interest or it is same like simple interest? i am in trouble please help me out

.

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%)

Shehvar says

thank you so much for such a superb notes. please tell me what is nominal interest?

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sunshine2 says

Excellent lecture – thank you so much!!

angelang says

why they use 2+ 25/50? 2 , 25, 50 come from where?

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.

jefta says

is it possible to view this lectures on my phone, and i cant download the notes its blank after download. Help…

admin says

@jefta, yes lecture should play on your phone

use adobe reader X to open the file

DA CEILSO says

this lectures is very surperb

gincru says

thank you for you help it is going to help me pass tom.

zengyuxian says

reply

matubes says

i am unable to download this revision notes

naveedawan says

@matubes, its simple click on the bare ,but there is a thing which is necessary is adobe acrobat reader must instal on your computer for opening these notes