Hi John,
Absolutely brilliant lectures in explaining linear programming and multi period capital rationing. Couldn't have been any simpler! One question for you, if that is okay with you. Please can you explain why a, b and c have to be the same in year 1 and year 2. I mean the same fractions repeating year 1 and year 2. Can't it be like a,b, c for the first year and d, e, f for the second year per se pls. Because, we are not very sure if the fractions are the same. Aren't we?
J
julianleong·
Hi Mr. Moffat,
I don't understand why the first formula is <=14000 since any capital not invested in time zero may be put into a deposit. In real life, we will definitely put it into a deposit to earn the 7% interest even though it is less than the cost of capital of 10% so the formula should always be =14000. Theoretically, though, it is possible to not put the unused capital into a deposit and it could be <=14000. Is this where you are coming from?
J
John MoffatTutor·
Why on earth would you definitely put money on deposit when it is being borrowed at 10% and depositing it only earns 7%? !! It would be better simply not to borrow it (unless being able to use the money a year later could end up giving a higher return than the amount being lost in the first year).
N
Naeez·
Sir,
is it right if I formulate the constraint for Y this way:
4000a + 6000c ? 5000 + 1.07x +2000b
Pls Advise!
N
Naeez·
^^
Year 1
4000a + 6000c <(less than or equal) 5000 + 1.07x +2000b
K
karang·
Hi John
Do we take interest on debt while calculating the NPV of a project in project appraisal in our cash flows as we will having a cash outflow??
So if we are not considering than it will PBIT to which we will deduct tax and add back dep right??
B
bolajiekundayo·
Hello sir
Can you please explain how did you get the npv of po (0.027) ?? does it mean the pv of Po is 0.946
if the NPV = 0.973Po – Po = – 0.027Po
Thanks
Bola
J
John MoffatTutor·
0.973xPo - 1xPo = Po (0.973 - 1) = Po x 0.027
H
Husnain·
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
J
John MoffatTutor·
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
H
Husnain·
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
J
John MoffatTutor·
(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.
D
Dean·
could you please elaborate on the meaning of " infinitely divisible"? Thank you.
D
Dean·
and plus is it ok with 0<=P(0)<=14000 for precision?
J
John MoffatTutor·
For the first, it means you can do any fraction of a project.
For the second, it is OK.
M
Megan·
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?
O
opentuition_teamAdmin·
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.
C
chimmm·
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 ??
J
John MoffatTutor·
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
C
chimmm·
Sir ,
Can you please explain how did you get the npv of po (0.027) ??
C
chimmm·
In the multi period capital rationing .
J
John MoffatTutor·
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
C
chimmm·
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- ??
C
chimmm·
Isn't it should be like this :
Inflow of 1.07 × 0.909 (10% disc factor) and the ans will be 0.973.
J
John MoffatTutor·
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
Z
Zhixiang·
Hi John,
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
J
John MoffatTutor·
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?
S
sid84·
here the 1st equation <=14000 ..where we have 14000 to invest
J
John MoffatTutor·
Are you asking a question?
S
sid84·
yes ... all three projects are giving positive npv but here the 1st equation <=14000 ..where we have $14000 to invest ?? why <= 14000 ?
J
John MoffatTutor·
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.
Absolutely brilliant lectures in explaining linear programming and multi period capital rationing. Couldn't have been any simpler! One question for you, if that is okay with you. Please can you explain why a, b and c have to be the same in year 1 and year 2. I mean the same fractions repeating year 1 and year 2. Can't it be like a,b, c for the first year and d, e, f for the second year per se pls. Because, we are not very sure if the fractions are the same. Aren't we?
I don't understand why the first formula is <=14000 since any capital not invested in time zero may be put into a deposit. In real life, we will definitely put it into a deposit to earn the 7% interest even though it is less than the cost of capital of 10% so the formula should always be =14000. Theoretically, though, it is possible to not put the unused capital into a deposit and it could be <=14000. Is this where you are coming from?
is it right if I formulate the constraint for Y this way:
4000a + 6000c ? 5000 + 1.07x +2000b
Pls Advise!
Year 1
4000a + 6000c <(less than or equal) 5000 + 1.07x +2000b
Do we take interest on debt while calculating the NPV of a project in project appraisal in our cash flows as we will having a cash outflow??
So if we are not considering than it will PBIT to which we will deduct tax and add back dep right??
Can you please explain how did you get the npv of po (0.027) ?? does it mean the pv of Po is 0.946
if the NPV = 0.973Po – Po = – 0.027Po
Thanks
Bola
when we divide 1.07 by 1.10 it does not equal to -0.027
Please can u ellaborate how you calculated -0.027
Therefore the NPV = 0973Po - Po = - 0.027Po
the equation is written as Maximise NPV= 976a+2529b+862c+(1.07/1.1 x-x)
there is no -0.027
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.
For the second, it is OK.
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?
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 ??
The PV of the inflow is 0.973Po
The time 0 outlay is Po
Therefore the NPV = 0.973Po - Po = - 0.027Po
Can you please explain how did you get the npv of po (0.027) ??
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
Inflow of 1.07 × 0.909 (10% disc factor) and the ans will be 0.973.
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
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
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?