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lisa says

Tq john . Now i get the clear pic about this topic ! Your lecture notes is very useful !

Molly Sum says

in this chapter we can understand the time value of money, the payback period and the internal rate of return and thank you so much of the lecturer in this chapter F2.

syahirah says

hai john im syahirah from malaysia .My questions is about the high low method .

last few day before enter into my exam , when i’m doing my revision , there has a question that confusing me .

says : total cost : $135,000 $ 170,000

Activity level : 16,000 22,000

Variable costs p/u is constant within this range of activity but there is a step up of $5,000 in the total fixed cost when the activity level exceeds 17500 units .

Q:what is the total cost at an activity level of 20,000 units ?

my calculation is i will :$170k – $5k -$135k = $30k

: 22k units – 16k units = 6k

Variable cost : $5 p/u

Fixed cost : $165k – ($5k x 16k)

= $85,000

thus : y = a + bx $85,000 + (20k x $5 ) = $185,000

but my answer is wrong and the correct answer was $160,000 .

can you please explain to me further why my calculation on fixed cost wrong ?

actually ,which cost that i should take either after minus up the step-up cost of $5,000 ($165,000) or including the step-up cost ($170,000) ?

thanks sir . =)

John Moffat says

You calculation of the fixed cost is wrong. It should be 135000 – (16000 x 5) = 55000

Having got the variable cost as $5, the quickest way to get the answer is just to say that the only difference between the total cost at 22000 and at 20000 is the variable cost if the extra 2000 units.

So the total cost will be 170000 – (2000 x 5)

John Moffat says

PS this page is for comments on the lecture on payback period.

In future please ask questions like this in the F2 Ask ACCA Tutor forum.

Molly Sum says

hi ,

if question asked : The company is aware that fixed costs INCREASE by $500 when sales exceed 200 units.

Why the answers no needs to add back $500 in the fixed costs ?

Your quickest way to use whether use for the questions when asked step up costs only and needs to add back that set up costs in the fixed costs ?

And the quickest way only use have step up costs ? thanks

aijaz says

In case the initial cash outflow is not recovered over the life of the project which has some scrap value, then should we consider the cash inflow from scrap in our calculation for payback period

John Moffat says

Yes – the scrap proceeds should be considered.

Javeria says

Hello John, i have a question after watching this lecture and practicing i was doing the test given in the notes on page 119 the question 2 requires IRR which can be calculated only if there are two percentages given, in the answers given at the end it says you did it with 20% where did u get that 20% please help ……

John Moffat says

You can make any two guesses to calculate the IRR.

Javeria says

ohh ok should it be higher than the rate given ?

John Moffat says

If the rate given gives a positive NPV then your guess should be a higher rate. If it gives a negative NPV then your guess should be a lower rate.

Javeria says

Ok thank u i did not knew that that is very helpful information =)

mohammed says

our present value is 100000 so why do we need to find the present value of each and every year

John Moffat says

The present value is not 100,000!

100,000 is the initial cost of the project.

We calculate the present value of each year so that we can calculate how many years it takes to get back 100,000 (for the discounted payback period).

Edgar says

I cant get the question 2 in test for this chapter, please help. How i supposed to know what percentage i need to work out to compare it with 12% and NPV 33830.

Also Im getting 3.34 in question 4 which is C and not D as its on the back.

Many thanks in advance

Edgar says

Please help i only have 7 days left to exam

John Moffat says

You can use any percentage as the second guess. The IRR will be slightly different because the relationship is not linear, but it will be the same to the nearest %.

The answer to question 4 is D. ‘Within’ means less than. 3.34 is not less than 3 years.

gabriele says

I understand now for question 4 but then for question 3 should it be answer D as well?

John Moffat says

No.

By the end of three years, the total cash received is 330,000.

The payback period is the time to get back the initial investment of 270,000 and so this is going to be less that (or within) 3 years.

faizi95 says

how did you get 0.909 ?

John Moffat says

From the discount tables. It is the one year discount factor at 10%.

(Have you watched the previous lecture on investment appraisal – part A ?)

tansi235 says

THANK YOU LOAAADS!!!!!

accakeisha says

great great great explanation OT……THUMBS WAY WAY UP!!!!