1. avatar says

    Hello Sir,

    Question 2 in the test questions after this chapter asks for the Internal Rate of Return (IRR) with no other discounting interest rate, hence, the difference in interest rates cannot be determined. The answers at the end of the notes uses 20%. Is there a way to determine the interest rate to be used if not given? if so, how? and if not, how do I go about it?

    Many thanks.

    • Profile photo of John Moffat says

      You can use any calculator, provided that it can not store or display text.

      Here is an extract from the ACCA exam regulations:

      ‘You are not permitted to use a dictionary or an electronic translator of any kind or have on or at your desk a calculator which can store or display text. You are also not permitted to use or have on or at your desk a mobile phone, tablet, pager, etc of any kind. These are known as ‘unauthorised items’. Any kept in bags or briefcases must be switched off at all times in the examination hall.’

  2. avatar says

    Sir could you please explain this

    Q. The following information relates to a two year project

    initial investment $1 million
    cash inflow year 1 $750000
    cash inflow year 2 $500000
    cost of capital year 1 10%
    cost of capital year 2 15%
    What is the NPV of project (to nearest $500)
    Thanks in advance

    • Profile photo of John Moffat says

      You need to discount the time 1 flow using the 1 year discount factor at 10% from the tables.
      For the time 2 flow you need to discount for 1 year at 10% and 1 year at 15%, so multiply together the 1 year factors at 10 and 15%.

  3. avatar says

    Goodnight John Moffat

    Please walk me through this question: At an interest rate of 15% the net present valve of a project is $2,500.

    At an interest rate of 20%, the net present valve falls to minus $4,000.

    What is the Internal Rate of Return of the Project

    • Profile photo of John Moffat says

      The net present value (not valve :-) ), falls by 6,500 over a chang of 5%’s.

      At 15% the NPV is 2500, and so we want it to fall by 2,500 to get an NPV of zero.
      A fall of 2,500 will be 2500/6500 x 5%.

      If you add this to the 15%, then you will have the IRR.

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