I was just wondering if there is any way to calculate the APR backward? so for example, if we weren’t told the monthly rate in this example i.e 2% and we were just given the APR i.e 26.82%. Say we were only told this was compounded over a period 12 months, how would you figure out the monthly rate?

In practice they more normally calculate a daily rate and then charge each month depending on the number of days in the month. In the exam you don’t unless the question tells you to.

Can I ask if there is a formula for calculating example one? as if this is simple interest my learning books says the formula should be 200 + (200 x 0.15 x 4), when I apply this formula my answer is 24000 which is completely wrong…..

No there isn’t a formula (or at least one you should learn).

The formula that you have written would be correct if there was only an initial deposit of 200. Here there is an extra 200 every year. Also what you have written certainly does not come to 24,000 – think about it, how could it possibly be anything like 24,000? 馃檪 It actually comes to 320.

Hi can you please explain this question taken from June 2013 exam paper.

A project has an initial outflow of $12000 followed by six equal annual cash inflows, commencing in one years’ time. The payback period is exactly four years . The cost of capital is 12% per year. What is the project’s net present value ( to the nearest $) ?

A. $333 B. $ -2,899 C. $ -3,778 D. $ -5926

The correct answer is option A.

2. An investment project has the following discounted cash flows($’000).

fahim231 says

Hey John

I was just wondering if there is any way to calculate the APR backward? so for example, if we weren’t told the monthly rate in this example i.e 2% and we were just given the APR i.e 26.82%. Say we were only told this was compounded over a period 12 months, how would you figure out the monthly rate?

Great lecture by the way

John Moffat says

You would take the 12th root of 1.2682 and subtract 1.

So it would be exactly the same formula, but just used in reverse.

njivan28 says

Hi.Why is that if they charge a certain interest for a certain time,say a month,why is that you do not divide I rate by 365 and multiple n by 365?

John Moffat says

Because there are 12 months in a year.

In practice they more normally calculate a daily rate and then charge each month depending on the number of days in the month. In the exam you don’t unless the question tells you to.

akhalid93 says

In Quiz # 5 for Interest

Why he had added $ 6000 in our PV to get the derive the answer $69158?

Whereas in the video lecture we did not add $5000 with derived PV $41667.

Thank you

John Moffat says

Because in the test question the first payment is receivable immediately. The PV of 6,000 receivable immediately is 6,000.

The discount factor for a perpetuity give the PV when the flows are from 1 to infinity.

mary says

Hello Sir,

Can I ask if there is a formula for calculating example one? as if this is simple interest my learning books says the formula should be 200 + (200 x 0.15 x 4), when I apply this formula my answer is 24000 which is completely wrong…..

John Moffat says

No there isn’t a formula (or at least one you should learn).

The formula that you have written would be correct if there was only an initial deposit of 200. Here there is an extra 200 every year.

Also what you have written certainly does not come to 24,000 – think about it, how could it possibly be anything like 24,000? 馃檪 It actually comes to 320.

akhilmathew39 says

Sir,

Why Do you multiply it with 1.10 rather than multiplying it with 0.1 and finding the total?

John Moffat says

It is the same – multiplying by 1.1 is the same as multiplying by 0.1 and adding it on.

daud4328 says

Sir how did you get 1.1941 in the last question?

John Moffat says

I show how on the screen – it is 1.03^6

You either multiply 1.03 by 1.03 six times, or more sensibly you get a scientific calculator with a button for x^y on it 馃檪

daud4328 says

ohh, i was doing it like this 1.03^2, now i understand why it is 1.03^6, thank you very much sir

John Moffat says

You are welcome 馃檪

Sammar says

What’s the calculation behind 1.10??

Sammar says

Sorry, it’s explained further in the lecture.

darchana says

Hi can you please explain this question taken from June 2013 exam paper.

A project has an initial outflow of $12000 followed by six equal annual cash inflows, commencing in one years’ time. The payback period is exactly four years . The cost of capital is 12% per year. What is the project’s net present value ( to the nearest $) ?

A. $333

B. $ -2,899

C. $ -3,778

D. $ -5926

The correct answer is option A.

2. An investment project has the following discounted cash flows($’000).

Year Discounted rate

0% 10% 20%

0 (90) (90) (90)

1 30 27.3 25.0

2 30 24.8 29.8

3 30 22.5 17.4

4 30 20.5 14.5

=30 =5.1 = (12.3)

The required rate of return on investment is 10% per annum.

What is the discounted payback period of the investment project?

A. Less than 3.0 years

B. 3.0 years

C. Between 3.0 years and 4.0 years

D. More than 4.0 years

darchana says

The correct answer for 2nd Question is option is C.

John Moffat says

You must ask these questions in the F2 Ask the Tutor Forum, and not as a comment on a lecture.

(And I assume that you have watched the lectures on both interest and investment appraisal?)

The ACCA does not publish past exams for Paper F2, so these cannot be from the June 2013 exam!