• Profile photo of 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.

      • Profile photo of 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.

  1. avatar 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?

      • Profile photo of 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

  2. Profile photo of 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.

    • Profile photo of 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.

      • Profile photo of 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.

      • Profile photo of 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.

      • Profile photo of 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?

      • Profile photo of 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.

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