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  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.

  4. avatar says

    Please help me to solve this Question. An equal payments of $200 is deposited in an account every month for 6 years. Interest is 15% p.a which is Compounded every month. What will be the balance after 6 years?.

    • Profile photo of John Moffat says

      You need to use the annuity formula to get the present value of 200 a month, and then you need to compound the present value to get the terminal value by multiplying by (1+r)^n

      To get the present value you multiply 200 by 1/r x (1 – 1/(1+r)^n) and then to get the terminal value you multiply by (1+r)^n

      (or you can do both steps at once by multiplying 200 by 1/r x ( (1+r))^n – 1) )
      r is the monthly interest rate and r is the number of months.

  5. avatar says

    Can someone please help me, trying to procuce an investment appraisal for a project for my HND accounting exam. Can someone tell me if it is both fixed and variable costs that go in to get your cash flow or only variable? and also is depreciation of the machine included in this also?

    Need reply ASAP.

    Thanks

  6. Profile photo of nakeshia says

    A project has a normal pattern of cash flows. If the company’s cost of capital decreases what would be the effect on the NPV and the IRR.

    Would NPV & IRR stay the same?

    Need urgent reply.

    • Profile photo of John Moffat says

      The NPV will change – with a lower cost of capital, the NPV will increase (which is logical – with less interest cost the project becomes more worthwhile).
      Try is yourself – discount at a lower interest rate and see what happens.

      The IRR will not change – it is not dependent on the cost of capital.

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