Hello sir
In the question it is said that at time 0,we have $14000 available to us. So if we suppose do not invest the whole 14000, why would we ever leave the money idle and lose out on the 7% interest despite it being a loss when otherwise we would not be earning anything? But then again i think that if the money is borrowed money and 5000 is supposedly enough for time 1,we could just repay it, couldnt we? Thus preventing the loss i mean. It’d be of great help if you could clarify what i am misunderstanding here. Thank you.

Oh the second question is quite silly. If 5000 will suffice for time 2, we have no reason to not invest the whole of the 14000 due to the positive npvs. Pls do ignore the second question.

Cash held within the company is effectively being borrowed from shareholders (they are entitled to it as dividend and so by not giving it them we are borrowing it from them). Depositing it at only 7% when it is costing 10% to borrow is losing money and so is only sensible if by keeping it on deposit it could be invested better in later years. If not it should be given to shareholders.

All I have done whilst revising this paper is learn mathematics. BODMAS, rearranging equations, logarithm etc. I never knew this paper required such as high understanding of maths!

I would not really say that it is high level maths – BODMAS and rearranging equations is needed in many of the earlier exams, and the only place you need logs in P4 is in the Black Scholes option pricing formula).

We assumed that 14000 will be borrowed amount, why we need to borrow 14000 if that can’t be invested completely in year 0 and we have to deposit rest of the amount for making loss?

We don’t assume we borrow 14,000 – we assume that we do not borrow more than 14,000.

It might be worth borrowing money even though it cannot be invested at time 0 and makes a loss because it means we will have more to invest next year which could be beneficial.

Because the question says that money can be put on deposit at time 0 for one year. So it is an outflow at time 0 and then at time 1 there is an inflow as it comes back (together with interest).

P is the amount put on deposit at time 0, for one year at 7% (the question says that any capital not used in year 0 may be put on deposit for one year)

So it is like an extra investment and therefore given that our objective is to maximise the total NPV of the investments, we need to include the NPV of investment P. We know the outflow at time 0 is P so for the NPV we need to calculate the PV of the inflow in one years time.

Because the present value of the inflow is less than the outflow (we are depositing at 7% but the cost of capital is 10%).

Usually we would not invest when there is a negative NPV, but here it could be still worthwhile because it means money is available at time 1 and maybe it could be invested better at time 1 than at time 0 in the main projects.

I don’t quite understand how you got the nov for p in the last part of the exam. I understand up to the part of 0.97263 but I can’t work out how you got negative NPV of -.02737?

There is an outflow of p at time 0, and an inflow of p(1.07) at time 1 (p together with 7% interest).
The present value of the flow at time 1 is p(1.07)/1.1 (dividing by 1.1 to discount for 1 year at 10%). This is equal to p x 0.97273

I would have thought 5000a+8000b+6000c+p=14000 for the mere fact we don’t want to have idle resources when we could earn something from them. Because leaving it less than or equal to tends to allow one to decide to live resources idle.

I technically you are better off even investing the US$ that remains unallocated because even though the cost of capital is more than return you increase available funds for year 1 investment

alternatively in the above example only one would be correct in their assumption i believe that p=0 as the company stands to benefit more if all moneys are tied to projects than invested. Its interesting just how this simple example has initiated a thought process of possibilities in my head! I think i love this subject.

Can anyone tell me that if I master the calculations…. will it be enough to get me a pass or should i do other things as well?? And if yes, what else??

Are you talking just about capital rationing, or about the whole syllabus?

Although it is obviously important to master the calculations, there is a lot of writing in the exam and you do need to be able to discuss and explain things properly if you are going to pass.
In addition, the compulsory part (a) question will almost certainly involve writing a report and there are marks for the professionalism of it as well as for the content.

Well I am talking about the whole syllabus!!! I am not sure yet about this paper.. and am wondering if i can do the calculations and write or analyse the numbers, they would be enough to get me a pass. I dont have to go overboard about getting everything perfect. Because I have heard that this is a really tough paper to pass. And thanks alot for your help.

It is a tough paper, but if you understand the topics and you can make a reasonable attempt at the calculations (and you can write about what is happening) then it is not so terribly difficult to get pass marks.

Just 1 more thing. If I complete all these open-tuition lectures and notes, will they be enough including some practice questions from ACCA Approved kit?

We do not claim to have as much details as Study Texts, but there is certainly enough to pass the exam – provided you really do understand the topics, and provided you have practiced as many question as possible from Revision/Exam Kit, and past exam questions.

Great..my p4 teacher asked to revise f9 concepts of DCF..i didnt have the book or kit or anything….but the lecs here are so awesome that even i couldnt have revised better myself.

sayma says

Hello sir

In the question it is said that at time 0,we have $14000 available to us. So if we suppose do not invest the whole 14000, why would we ever leave the money idle and lose out on the 7% interest despite it being a loss when otherwise we would not be earning anything? But then again i think that if the money is borrowed money and 5000 is supposedly enough for time 1,we could just repay it, couldnt we? Thus preventing the loss i mean. It’d be of great help if you could clarify what i am misunderstanding here. Thank you.

sayma says

Oh the second question is quite silly. If 5000 will suffice for time 2, we have no reason to not invest the whole of the 14000 due to the positive npvs. Pls do ignore the second question.

John Moffat says

Cash held within the company is effectively being borrowed from shareholders (they are entitled to it as dividend and so by not giving it them we are borrowing it from them). Depositing it at only 7% when it is costing 10% to borrow is losing money and so is only sensible if by keeping it on deposit it could be invested better in later years. If not it should be given to shareholders.

Daniel says

All I have done whilst revising this paper is learn mathematics. BODMAS, rearranging equations, logarithm etc. I never knew this paper required such as high understanding of maths!

John Moffat says

I would not really say that it is high level maths – BODMAS and rearranging equations is needed in many of the earlier exams, and the only place you need logs in P4 is in the Black Scholes option pricing formula).

Ivan says

Sir,

Why do not we constrain P in that way:

1?P?0?

P?0 – implies that P could be more than one?

Ivan says

something wrong with symbol

? is “more or equal” there.

John Moffat says

Why on earth should P be less than 1???

P is the amount put on deposit – not a proportion.

P>=0 is correct.

Ivan says

ok, thank you, I get it P is in dollars!

sohail says

We assumed that 14000 will be borrowed amount, why we need to borrow 14000 if that can’t be invested completely in year 0 and we have to deposit rest of the amount for making loss?

John Moffat says

We don’t assume we borrow 14,000 – we assume that we do not borrow more than 14,000.

It might be worth borrowing money even though it cannot be invested at time 0 and makes a loss because it means we will have more to invest next year which could be beneficial.

luowl706 says

I don’t understand why P at time 1 is treated as inflow.

John Moffat says

Because the question says that money can be put on deposit at time 0 for one year. So it is an outflow at time 0 and then at time 1 there is an inflow as it comes back (together with interest).

luowl706 says

Thank you!

QIN says

I can not understand why P will be back for year one

John Moffat says

P is the amount put on deposit at time 0, for one year at 7% (the question says that any capital not used in year 0 may be put on deposit for one year)

So it is like an extra investment and therefore given that our objective is to maximise the total NPV of the investments, we need to include the NPV of investment P. We know the outflow at time 0 is P so for the NPV we need to calculate the PV of the inflow in one years time.

QIN says

Thanks, but why in year 0 P is negative as cash outflow if it is the deposit

John Moffat says

Because the present value of the inflow is less than the outflow (we are depositing at 7% but the cost of capital is 10%).

Usually we would not invest when there is a negative NPV, but here it could be still worthwhile because it means money is available at time 1 and maybe it could be invested better at time 1 than at time 0 in the main projects.

QIN says

thanks

uttinge says

I don’t quite understand how you got the nov for p in the last part of the exam. I understand up to the part of 0.97263 but I can’t work out how you got negative NPV of -.02737?

uttinge says

sorry that last figure should have read 0.02737

John Moffat says

There is an outflow of p at time 0, and an inflow of p(1.07) at time 1 (p together with 7% interest).

The present value of the flow at time 1 is p(1.07)/1.1 (dividing by 1.1 to discount for 1 year at 10%). This is equal to p x 0.97273

So the NPV is 0.97373p – p = -0.02727p

tinashe says

I would have thought 5000a+8000b+6000c+p=14000 for the mere fact we don’t want to have idle resources when we could earn something from them. Because leaving it less than or equal to tends to allow one to decide to live resources idle.

I technically you are better off even investing the US$ that remains unallocated because even though the cost of capital is more than return you increase available funds for year 1 investment

alternatively in the above example only one would be correct in their assumption i believe that p=0 as the company stands to benefit more if all moneys are tied to projects than invested. Its interesting just how this simple example has initiated a thought process of possibilities in my head! I think i love this subject.

hssniqbl says

Can anyone tell me that if I master the calculations…. will it be enough to get me a pass or should i do other things as well?? And if yes, what else??

John Moffat says

Are you talking just about capital rationing, or about the whole syllabus?

Although it is obviously important to master the calculations, there is a lot of writing in the exam and you do need to be able to discuss and explain things properly if you are going to pass.

In addition, the compulsory part (a) question will almost certainly involve writing a report and there are marks for the professionalism of it as well as for the content.

hssniqbl says

Well I am talking about the whole syllabus!!! I am not sure yet about this paper.. and am wondering if i can do the calculations and write or analyse the numbers, they would be enough to get me a pass. I dont have to go overboard about getting everything perfect. Because I have heard that this is a really tough paper to pass. And thanks alot for your help.

John Moffat says

It is a tough paper, but if you understand the topics and you can make a reasonable attempt at the calculations (and you can write about what is happening) then it is not so terribly difficult to get pass marks.

hssniqbl says

Well I do hope I pass it. And thanks for all your help. I guess I am just nervous about the paper.

John Moffat says

Be confident – you will be OK 🙂

hssniqbl says

Just 1 more thing. If I complete all these open-tuition lectures and notes, will they be enough including some practice questions from ACCA Approved kit?

John Moffat says

We do not claim to have as much details as Study Texts, but there is certainly enough to pass the exam – provided you really do understand the topics, and provided you have practiced as many question as possible from Revision/Exam Kit, and past exam questions.

maihan says

Why I can’t view this lecturer ? Please check if there’s any error. Thanks

nailya1908 says

Thank you very much! Everything is so clear! I am just happy I found you!

bernadetta says

Lectures on Discounting casflow techniques were well understood

warrioroflight says

Great..my p4 teacher asked to revise f9 concepts of DCF..i didnt have the book or kit or anything….but the lecs here are so awesome that even i couldnt have revised better myself.