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December 26, 2017 at 6:29 pm
using the cross multiplication is very helpful both for understanding but also to save time and learning long formulae. Thank. you very much
November 29, 2017 at 5:12 pm
Thank you for the great work, this video played a big role in the success of my exam. With open tuition videos and notes I was able to prepare within the limited time I had. Once again thank you for the explanations and notes
John Moffat says
November 29, 2017 at 5:22 pm
Thank you for your comment, and many congratulations on your success 🙂
October 22, 2017 at 4:39 pm
Hi John, I have a question concerning depreciation when calculating cash flows and NPV.
In ACCA F2 exam kit I came over a test in which depreciation was included when calculating cash flows (the explanation in answers was the following: “Depreciation is not a cash flow so needs to be added back to profit to calculate cash flows”).
But F2 text books and comments here state that depreciation is not an actual cash flow so it is not included in the capital appraisal calculation.
How can I differentiate when it should be included and when not? Or maybe there was a mistake in the exam kit?
Thank you very much!
October 23, 2017 at 7:46 am
Please don’t put links to other websites (the link you gave was more relevant to Paper P4 anyway), and please in future ask this sort of question in the Ask the Tutor Forum.
Net present value is always calculated using only the cash flows, as explained in my lecture. Accounting profits are after subtracting depreciation. Depreciation is not a cash flow and therefore it needs to be added to the accounting profit to determine the cash flow. There is certainly not a mistake in the exam kit – this point is fundamental to NPV calculations.
October 21, 2017 at 5:47 pm
Hi John, I just have one question, how to know with accuracy with table to use? I mean by that how to distinguish this is the annuity table or the present value table that I going to use when it comes for calculations. thanks
October 22, 2017 at 8:26 am
But I explain this in the lectures!!
You use the present value table for individual cash flows, and you use the annuity table for equal annual cash flows.
October 23, 2017 at 10:08 am
Thanks a lot.
October 2, 2017 at 6:38 pm
Hi John, For NPV, I have a Question. I understand the calc but I just want to have a deep understanding of why. The interest is 10%, but why are we calcing this against receipts and not against the loan/investment figure of 80k? With simple interest we come in with a figure of 6,000 net present value. W/ compound, 7,128. I know these are wrong. I just want to grasp fully, why we deduct from the receipts and not the investment/loan…..It’s been a long day.
October 3, 2017 at 8:07 am
You could add interest to the amount borrowed and end up with a terminal value (as I explain in the lecture). However, rather than end up with a value at the end of the project’s life, it is more useful for decision making to have an equivalent value ‘now’ which instead means removing interest from the future cash flows.
October 3, 2017 at 12:06 pm
June 12, 2017 at 10:36 am
Sorry John if a question asks us to round the IRR to the appropriate integer should we always round it downwards? Why if so?
June 12, 2017 at 2:46 pm
No – round it to the nearest integer.
June 11, 2017 at 7:38 pm
Hi John Can you please help, if I have a calculator which calculates NPV and IRR automatically – is it worth using it? Because for IRR I always to get different answer than using the approach discussed in the lecture for about 1 percentage point. Thanks. For now it seems that it can only create problems in the exam.
June 12, 2017 at 7:14 am
No – don’t use it 🙂 (And if it displays text as well as numbers then you are not allowed to take it to the exam)
June 12, 2017 at 8:45 am
Thank you! No, it’s a general calculator designed for CFA exam, the only thing it calculates similiar to the answers is just the payback period, unfortunately.
April 29, 2016 at 12:26 pm
Hi John. There’s a question in the practice exam about Accounting Rate of Return, and I’ve watched both of your Investment Appraisal lectures, but I can’t find ARR in either of them. Is there another lecture I’m not aware of? Thanks for all your help so far. 🙂
April 29, 2016 at 12:59 pm
I should really remove it because ARR itself is not in the syllabus.
However it is effectively the same as ROI which is covered as part of divisional performance measurement.
February 24, 2016 at 6:39 am
I would like to know if it is possible for IRR to be less than cost of capital and NPV to be positive, or IRR to be greater than cost of capital and NPV to be negative, should we accept the project? Based on which criteria?
February 24, 2016 at 11:20 am
If the IRR is less than the cost of capital, then the NPV will be negative and the project should be rejected. If the IRR is more than the cost of capital then the NPV will be positive and the project should be accepted. The reasoning for this is explained within the lectures on IRR.
February 16, 2016 at 3:01 pm
Good day In the mock exam there is a question to calculate the NPV, however this question includes inflows and outflows in every year. I took the net (Inflow less outflow) p.a and calculated that based on the NPV table in every year. I have done the question several times but my answer is always incorrect (I have NPV of +$53,520) the answer when I review is +$53,610 – This is a small difference and I wonder if the NPV table with only 3 decimals could cause this?
The question is as follows: Initial investment $300,000 Inflow per annum $120,000 Outflow (Incremental cost) per annum $30,000 Scrap value $20,000
Please help! 🙂
February 16, 2016 at 4:49 pm
Yes – it will be because of the rounding in the tables. Best is to use the tables that are provided in the exam 🙂
February 17, 2016 at 4:29 am
February 17, 2016 at 7:04 am
You are welcome 🙂
February 25, 2017 at 12:31 am
I’m confused on this difference too. I still get that difference even though I am using the tables provided at the beginning of the notes.
December 28, 2015 at 2:59 am
Do I have to worry about annuities and perpetuities in advance/arrears?
December 28, 2015 at 3:46 am
Also I wish to know why there is no impact on IRR when the cost of capital changes? Just came across a MCQ!
December 28, 2015 at 7:21 am
The IRR is the rate of interest at which the NPV is zero. It is irrelevant when calculating it what the cost of capital is – the cost of capital may be higher or lower than the IRR.
December 28, 2015 at 7:19 am
Yes – annuities and perpetuities starting at time 0 instead of time 1, or starting later than time 1, are examined and are covered in the lectures.
December 10, 2015 at 2:33 pm
For the first example, although the NPV has a surplus of $6660, why should we accept the project if we could invest $80 000 at 10% interest p.a. for 4 years which will give a total return of $117 128? Thanks!
December 10, 2015 at 2:55 pm
But if you invested the returns from the project at 10% per year you would end up with 126,920 which is more! That would be the terminal value, and you cannot compare terminal values with present values. The net terminal value would be 126,920 – 117,128 = 9,792 The net present value is 6,660.
6,660 now is equivalent to 9792 in 4 years time (6,660 x 1.1^4 = 9,751, the difference is simply due to rounding)
December 10, 2015 at 3:59 pm
Right…i was not thinking about investing the returns. May I know how you got the terminal value $126 920? Thanks for your prompt reply!
December 10, 2015 at 7:25 pm
20,000 invested for 3 years (year 1 to year 4) grows to 20,000 x 1.1^3 30,000 invested for 2 years grows to 30,000 x 1.1^2 40,000 invested for 1 year grows to 40,000 x 1.1 and a total of 20,000 in 4 years, stays at 20,000
Then add them all together 🙂
November 30, 2015 at 8:08 pm
Hi Sir, Is the figure “15%” a given figure or at random? or I can choose another percentage like 16% 17% 20% etc; How can I get this percentage figure to compare?
December 1, 2015 at 6:11 am
I do make it clear in the lecture than you can use any two ‘guesses’ in order to calculate the IRR (unless, obviously, the question specifically tells you which two rates to use).
October 28, 2015 at 2:01 pm
17400 + 22680 + 26320 + 5720 + 5720 = 77840
80,000 – 77840 = 2160 It gives a positive value not a negative???
October 28, 2015 at 3:23 pm
What you have written does give a positive value, but you have written it wrong!!
The 80,000 is an outflow (which is why it has brackets round it). The other flows are all inflows. So there is a net outflow.
October 28, 2015 at 3:24 pm
Oh yeah, sorry about that.
November 8, 2014 at 6:19 pm
How do I calculate the discount factor for a 12.5% discount rate? Thank you
November 8, 2014 at 7:03 pm
You use the formula that is given at the top of the formula sheet (depending on whether you want the normal discount factor, or the annuity discount factor). I go through this in the previous lecture.
October 27, 2014 at 7:52 am
Thank you for help. One question though..in the test post the chapter I’m not understanding why 8% was used to arrive at the IRR of 18%. I did get 18% but this was done the long way. Please assist
October 27, 2014 at 4:57 pm
I don’t know what you mean by ‘the long way’- there is only one way of doing it, making two ‘guesses’ and then approximating between them.
Since we had already been asked to calculate the NPV at 12%, we had one value. You could try any rate of interest for the second value – my answer tried 20%. (8% is the difference between 20% and 12%).
October 27, 2014 at 7:08 pm
October 23, 2014 at 8:40 pm
You have asked this question twice, and I have already replied to the first one.
October 23, 2014 at 6:24 pm
This was very helpful thank u but can u work this question for me plz An investment has the following inflows and outflows
Time Cash flow per annum 0 (20,000) 1-4 3,000 5-8 7,000 10 (10,000)
What is the net present value of the investment at a discount rate of 8% ?
Farzana sultana says
February 9, 2015 at 10:04 pm
is the answer -97265
February 9, 2015 at 10:08 pm
sorry,the answer should b this one -36935.i made a mistake first time
August 24, 2014 at 9:19 am
Question 2 in the test questions after this chapter asks for the Internal Rate of Return (IRR) with no other discounting interest rate, hence, the difference in interest rates cannot be determined. The answers at the end of the notes uses 20%. Is there a way to determine the interest rate to be used if not given? if so, how? and if not, how do I go about it?
August 24, 2014 at 9:36 am
No- there is no way to determine.
As I explain in the lecture, you make one guess and then make a second guess. Any two guesses will do.
July 17, 2014 at 5:05 pm
can we use a cfa approved calculator for all acca exams? – Thanks!
July 17, 2014 at 5:52 pm
You can use any calculator, provided that it can not store or display text.
Here is an extract from the ACCA exam regulations:
‘You are not permitted to use a dictionary or an electronic translator of any kind or have on or at your desk a calculator which can store or display text. You are also not permitted to use or have on or at your desk a mobile phone, tablet, pager, etc of any kind. These are known as ‘unauthorised items’. Any kept in bags or briefcases must be switched off at all times in the examination hall.’
February 9, 2014 at 11:47 am
Sir could you please explain this
Q. The following information relates to a two year project
initial investment $1 million cash inflow year 1 $750000 cash inflow year 2 $500000 cost of capital year 1 10% cost of capital year 2 15% What is the NPV of project (to nearest $500) Thanks in advance
February 9, 2014 at 11:53 am
You need to discount the time 1 flow using the 1 year discount factor at 10% from the tables. For the time 2 flow you need to discount for 1 year at 10% and 1 year at 15%, so multiply together the 1 year factors at 10 and 15%.
January 18, 2016 at 6:27 am
Sir , is this how the answer is done for the question: 750000*0.909=681750-1000000=318250 500000*0.756=378000-1000000=622000 10+318250/318250-6220000*10 =9.461 =94.6%
January 18, 2016 at 7:06 am
No – this makes no sense at all, and the NPV is never a %. You do it the way that I wrote before.
January 18, 2016 at 9:07 pm
Sir sorry I might have done different thing as this is my first class on this , I should have done this : Year. Df. Cash flow 0. – ( 1000000) 1. 0.909 750000. =681750 2. 0.756 500000. = 378000 Total – 1000000 =59750 ( npv) Can u plz suggest me again .
April 26, 2016 at 2:28 pm
Hi. Would you kindly explain the cost of capital. If a comp invests 24000 and and profits are 5000 pa for 6 years. Cost of capital is 12%. Its 12%of 5000 pa. Why does the comp get 12% less on each increment of 5000? Where does this cost come from? And why is it deducted from the 5000 each year?
April 26, 2016 at 6:10 pm
The interest is charged on the amount invested. AT the beginning the interest is on the entire 24,000 but every time we receive 5,000 it reduces the amount borrowed and therefore saves interest.
The cost of capital is effectively the interest and you cannot be required to calculate it until Paper F9. In Paper F2 it will be given in the question.
October 23, 2013 at 9:17 am
Thank you John Moffat. Thanks for the correction in spelling. Typo error and maybe exam pressure lol.
Have a bless Day .
October 23, 2013 at 1:14 am
Goodnight John Moffat
Please walk me through this question: At an interest rate of 15% the net present valve of a project is $2,500.
At an interest rate of 20%, the net present valve falls to minus $4,000.
What is the Internal Rate of Return of the Project
October 23, 2013 at 9:12 am
The net present value (not valve 🙂 ), falls by 6,500 over a chang of 5%’s.
At 15% the NPV is 2500, and so we want it to fall by 2,500 to get an NPV of zero. A fall of 2,500 will be 2500/6500 x 5%.
If you add this to the 15%, then you will have the IRR.
January 18, 2016 at 6:33 am
Sir if the answer for this is 16.92%?
July 31, 2013 at 2:09 am
Mr john is the best!! i love seeing him in the videos. it kind of gets more interactive. if possible please show up in the bideos Mr. john:)!
July 25, 2013 at 5:52 am
Please help me to solve this Question. An equal payments of $200 is deposited in an account every month for 6 years. Interest is 15% p.a which is Compounded every month. What will be the balance after 6 years?.
July 25, 2013 at 11:39 am
You need to use the annuity formula to get the present value of 200 a month, and then you need to compound the present value to get the terminal value by multiplying by (1+r)^n
To get the present value you multiply 200 by 1/r x (1 – 1/(1+r)^n) and then to get the terminal value you multiply by (1+r)^n
(or you can do both steps at once by multiplying 200 by 1/r x ( (1+r))^n – 1) ) r is the monthly interest rate and r is the number of months.
December 26, 2015 at 9:49 am
Hi. What would the answer for this question be and how would the workings be carried out? Thanks
December 26, 2015 at 10:08 am
Hi. What would the answer for this question be and plz could you do the workings for me using numbers? I would greatly appreciate this 😀 Thanks
December 26, 2015 at 11:12 am
I have shown the working in my last reply 🙂
You won’t get more complicated problems
July 25, 2013 at 9:26 pm
Thank you sir, now l can solve more complicated problems. God bless you.
April 25, 2013 at 10:30 pm
Can someone please help me, trying to procuce an investment appraisal for a project for my HND accounting exam. Can someone tell me if it is both fixed and variable costs that go in to get your cash flow or only variable? and also is depreciation of the machine included in this also?
Need reply ASAP.
May 23, 2013 at 3:02 am
you must note that depreciation is a non cash component. It will not be in the cash flow.
May 23, 2013 at 5:38 am
You only include extra (incremental) cash costs to the company.
So depreciation is never included – it is not a cash cost. Variable costs will be included – they will be extra costs. Any extra fixed costs that will be incurred by the company are included (but only if they are extra costs)
April 6, 2013 at 11:26 pm
thank you soooooooo much !!!!!!!
April 4, 2013 at 8:58 pm
A project has a normal pattern of cash flows. If the company’s cost of capital decreases what would be the effect on the NPV and the IRR.
Would NPV & IRR stay the same?
Need urgent reply.
April 5, 2013 at 10:17 am
The NPV will change – with a lower cost of capital, the NPV will increase (which is logical – with less interest cost the project becomes more worthwhile). Try is yourself – discount at a lower interest rate and see what happens.
The IRR will not change – it is not dependent on the cost of capital.
March 31, 2013 at 4:31 am
Great appreciate !!!!!!
February 16, 2013 at 9:26 pm
Why isn’t the question he is reading not in the course notes???
February 16, 2013 at 9:40 pm
Ok! I’m so sorry! It was my mistake. Found it!
December 3, 2012 at 9:23 am
thank you sooooooo much…its really helpful 🙂
November 24, 2012 at 12:12 pm
On the test question 2 where is the 20% coming from.
November 24, 2012 at 10:13 am
Is this John Moffat’s lecture?
November 24, 2012 at 11:34 am
Yes, why? 🙂
November 9, 2012 at 9:17 am
you are the best!!!!
October 26, 2012 at 12:57 pm
my goodness!!!i dont think there are other lecturers in the world better than OT…………….i was lost on the internal rate of return….but now i am found…thx OT!!!
October 10, 2012 at 2:39 am
not able to view it on android gingerbread tablet. pls advise.
October 10, 2012 at 7:05 am
install if you have not already flash player
October 9, 2012 at 5:14 pm
i can’t access the online tuition tells me server not found so please help me out.thank you.
October 9, 2012 at 5:23 pm
you are most likely behind a firewall, contact your internet provider for help
September 13, 2012 at 8:00 pm
Thanks. Great lecture. It makes things so much more understandable.
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