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  2. Hello Sir,

    Thank you for your lectures they are very clear and easy to understand.

    I however have one small question on example 2 IRR calculation where we deducted -2160 from +6660 the answer should it not be +8820 instead of -8820? Is there anything I have missed

    Thank you

  4. Hi John,

    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

  5. 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!

    • 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.

  6. 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

  7. 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.

    • 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.

  9. 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.

  10. 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. 馃檪

    Aidan

  11. Hi Sir,

    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?

    Thanks!

    • 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.

  12. 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! 馃檪

  14. Hi sir,

    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!

    • 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)

      • 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 馃檪

  15. 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?

  18. 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

    • 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%).

  20. 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% ?

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