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November 27, 2020 at 8:47 am
sir so if we use NPV per $ invested we realise that A and B are better options compared to C. But we can remain invested in 1/6th of project C (infinitely divisible) at T0. And at T1 1/6th of C would need $1000 of investment and A would $4000 of investment, which will be fully covered by $5000 of cash surplus at T1.
The point where am i trying to get to is that, when deciding between Project C and depositing at 7%(both of which are feasible but mutually-exclusive) at T0, do we compare C’s overall IRR with deposit rate or look at the fact that in 1year’s time C reaps no return whereas depositing the money at least lands 7%? As in on what basis do we decide the fate of remaining $14000-$5000-$8000=$1000??
I know in the exam we may never have to recommend, but just out of curiosity i was wanting to know this. Would be glad if you could shed some light on this sir!
September 26, 2020 at 11:19 am
hello john when we divide 1.07 by 1.10 it does not equal to -0.027 Please can u ellaborate how you calculated -0.027
John Moffat says
September 26, 2020 at 2:23 pm
Nowhere do I say it is equal to -0.027. It is equal to 0.973 exactly as I wrote.
Therefore the NPV = 0973Po – Po = – 0.027Po
September 27, 2020 at 1:47 pm
Sir i am confused because in answer of this example provided in notes the equation is written as Maximise NPV= 976a+2529b+862c+(1.07/1.1 x-x) there is no -0.027
September 27, 2020 at 3:36 pm
(1.07/1.1)X – X = – 0.027X
There is absolutely no point at all in using the notes without watching the lectures – they are only lecture notes to be used with the lectures.
May 24, 2020 at 8:29 am
could you please elaborate on the meaning of ” infinitely divisible”? Thank you.
May 24, 2020 at 8:54 am
and plus is it ok with 0<=P(0)<=14000 for precision?
May 24, 2020 at 11:44 am
For the first, it means you can do any fraction of a project. For the second, it is OK.
March 14, 2020 at 12:36 pm
Thank you, sir, for your lecture. It is well explained.
I do have a little question regarding the deposit.
If I get it right, you mentioned in the lecture the reason we do not need to put a deposit in year 1 is that there no limitation on time 2, so we don’t need to borrow.
Why no need to borrow leads to no deposit. Can’t I put a deposit just because I have more available money or I want to lower the risk?
March 14, 2020 at 5:28 pm
They are certainly entitled to put money on deposit if they want to, but there would be no point given that the interest they would earn is less than the cost of borrowing.
May 26, 2019 at 3:17 pm
Dear Sir Thanks for the explanation. I’m getting it Right till 0.973 but I’ve heard you say in the lecture 🙁 the npv is 0.1 – 0.973) . So maybe I can’t really catch that can you please tell how 0.1 is really the investment of po ??
May 27, 2019 at 12:43 pm
I did not say that in the lecture.
The PV of the inflow is 0.973Po The time 0 outlay is Po
Therefore the NPV = 0.973Po – Po = – 0.027Po
May 24, 2019 at 5:42 am
Sir , Can you please explain how did you get the npv of po (0.027) ??
May 24, 2019 at 5:43 am
In the multi period capital rationing .
May 24, 2019 at 9:15 am
But I actually show the workings for this in the lecture!!!!
There is an outflow of Po at time 0, and an inflow of Po(1.07) in 1 years time.
So the NPV is Po(1.07)/1.1 – Po = – 0.027
May 25, 2019 at 1:37 pm
Thanks for the reply. But why have you shown the inflow of 1.07 in brackets meaning negative. The inflow should be positive right? And then divided by 1.1- ??
May 25, 2019 at 1:41 pm
Isn’t it should be like this : Inflow of 1.07 × 0.909 (10% disc factor) and the ans will be 0.973.
May 25, 2019 at 3:46 pm
I have simply used brackets to show I am multiplying, not because it is negative!!!
Dividing by 1.1 is the same as multiplying by 0.909 (that is how discount factors are calculated, as you should remember from Papers MA (was F2) and FM (was F9) !!!)
What I wrote before is perfectly correct! Po x 1.07 / 1.1 = 0.973 Po Subtract the investment of Po and the NPV is – 0.027Po
February 6, 2019 at 1:48 am
I don’t really understand the objective of your working on Year 0 and 1.
I suppose Year 0 there is only $14,000 available cash flow. To invest I would choose Project B (8,000) and A (5,000) because of the NPV ranking, this will left me $1000 (14k – 8k – 5k) to be brought forward to Year 1 with another cash available of $5,000, which is $6000 (5k + 1k) in total, then I will be able to go for Project C. Am i missing something? Thanks
February 6, 2019 at 6:53 am
You are missing a few things.
Firstly, you say B is better than A because of the NPV ranking. B is better but I assume you mean because of the NPV per $ invested ranking (as per single period capital rationing from Paper FM (was F9).
Secondly, you say that you then have 6,000 available to invest in C at time 1. But C needs an investment of 6,000 at time 0 – nothing in the question says that C can be delayed.
Thirdly, even if C could be delayed, what about the fact that A gives a higher NPV per $ than A. Why do you prefer to invest in C rather than in A?
January 18, 2019 at 12:48 am
here the 1st equation <=14000 ..where we have 14000 to invest
January 18, 2019 at 7:43 am
Are you asking a question?
January 19, 2019 at 2:28 am
yes … all three projects are giving positive npv but here the 1st equation <=14000 ..where we have $14000 to invest ?? why <= 14000 ?
January 19, 2019 at 11:00 am
There is no requirement to invest all 14,000 – the money is being borrowed and there is only any point in investing it if the return covers the cost of borrowing.
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