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  1. Hello Sir,

    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?

    Many thanks.

    • 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.’

  3. 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

    • 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%.

      • 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%

      • 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 .

    • 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?

      • 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.

  5. 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

  6. 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:)!

  7. 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?.

  8. 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.

    Thanks

  10. A project has a normal pattern of cash flows. If the company鈥檚 cost of capital decreases what would be the effect on the NPV and the IRR.

    Would NPV & IRR stay the same?

    Need urgent reply.

    • 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.

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