# Multi Period Capital Rationing Example 4

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• 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).

• 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.

• says

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

• 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.

• says

thanks

1. 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?

• 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

2. 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.

3. 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??

• 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.

• 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.

• 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.

• says

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

• 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?

• 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.

4. says

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

5. 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.