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Can you please explain the difference between the two?
Does annuity table act like simple interest I.e 10% annuity for 5 years gives a present value cash flow £100,000 for arguments sake, Is that the same as saying that present value £100,000 will grow by £10,000 each year for the next five years?
I only ask because the present value table looks seems to be like compound interest. E.g if I discount a future cash flow to its present value using a cost of capital 10% for 5 years, I seem to get quite close to the future cash flow amount again by multiplying the present value by 1.10 5 times.
I guess I’m asking what’s the difference between these two?
Also when cost of capital is valued at 10% does that mean the investors into this project expect at least a 10% compounding return on there capital value?
E.g capital is £100,000 the project lasts 5 years and the cost of capital is 10%, so they’d expect £161,051 back to them by the end of the project in 5 years time?
Sorry if I’ve structured these questions weird
The annuity table is basically the sum of present values for each year added together. It can be used when there is a consistent cash flow over a period of time at constant discount rate. For example, $1000 dollars for three years at ten percent discount.
Please also see lectures and lecture notes on this topic from financial management. I think the lectures from chapter 7 should cover a lot of what you are asking about-
https://opentuition.com/acca/fm/acca-financial-management-fm-lectures/
If you are still confused please ask again here or on the ask the tutor forum. Hope this helps.
May I ask that using the present value table directly during the exam is better or using the formula such as =NPV(discount rate, CF Y1 to…) is better?
Because I found that they are completely different using different two methods, they may result one positive NPV or one negative NPV if they are so close to negative amount. (maybe the rounding problem) For example, Talam Co question I used the formula table, but final NPV amount is totally different.
But if I using the formula method in spreadsheet, then next question to ask about the present value of cash flow for the year 3 and year 4 so that I need to try again for calculating each year present value, then I found it using the table would be better at the start of the question.
Would you please advise which one method would be better.Connie3667, I am not entirely clear what you are asking. I would appreciate if you could elaborate a little. If you are referring to pure NPV calculations, I am not sure why simple rounding would lead to very different results. I found the following thread which relates to the exam (it focuses on IRR but should be helpful to you with the general advice given) and hopefully it should help you-
https://opentuition.com/topic/irr-77/
Please respond back. Hope this helps.
For example, Talam Co Mar/Jun 19 appendix 1 (part b):
The net cash flows was -36,032-3,908+3,820+23,193+29,584, then we can use the present value table 11% for Y1-Y4 = -36032*1-3908*0.901+3820*0.812+23193*0.731+29584*0.659 = -1.329m (if I have the rounding issue, then I calculated it at +$0.54m)
But if I used excel formula = NPV(11%, y1 to …), then it results at -$4.035m which may close to the exam kit answer -$6m.So, I am not sure whether we should use the present value table directly during the exam if they have different results.
Think the main problem here is definitions of units. Figures in the table are in thousands. As they themselves are figures of thousands they represent millions. However, the -$6000 approximate answer to which you refer, is a literal figure of -$6000. Therefore, the answers given by various methods are not nearly as far apart in absolute terms as they may at first seem.
I think in terms of which gives most accurate results, I would say Excel would be most accurate, followed by equation method then present value table method. However, they all give reasonably good answers given other assumptions and uncertainties involved in using Nov method. For example, all cash flows discounted as if occuring at year end. Hope this helps.
You might also find following thread useful-
https://opentuition.com/topic/rounding-differences-in-npv/
Hope this helps.
The above thread I posted is related to the financial management exam. I am near certain similar reasoning will be applied in terms of the Advanced Financial Management exam.
I assume you are studying Advanced Financial Management as that is the exam to which the question you asked relates.
Please also keep in mind that the exam platform varies from standard Excel. Make sure you obtain adequate practice with the platform.
Thank you so much for your help and reply, I will use more Excel formula method than others.
You are right that it is different to actual Excel, so I did a lot of practices in CEB platform spreadsheet already and hopefully can do it very smooth.
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