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    • What you call things is really of little relevance!!

      The present value of a cash flow is the present value of an individual flow (or flows). The net present value if the sum total of the present values of all the cash flows.

      If you are still unsure then it may help you to watch the Paper F2 lectures on investment appraisal, because this is basic revision of Paper F2 馃檪

      • Hi Sir,
        Thanks for replying. I knew it. Therefore for the sum up of PV in three timings= 72972=> shall we say it’s NPV?

      • No, because we are only looking at costs (we do not know the revenues and we do not need to know the revenues to make the decision).

        The 72,972 is the PV of the costs.

  3. Sir,
    NPV for every 2 years was $72972 and for 3years it was $87101.
    What I wanted to ask you is that why can’t we compare both those NPV value? Because after all we have we have discounted!!! Why it is necessary to find EAC to compare? Like what’s the science behind it?

    Thankyou.

  4. Hello Sir,

    Could u pls explain the reason for not considering scrap value in the 2 yr replacement calculation ? The scrap value is considered while calculating 1 yr and 3 yr replacement.

    Thanks and Regards

  7. Hi sir,

    I’ve watched your lecture but I still don’t get the rationale behind adjusting nominal value in step one to NPV, then adjust it again using annuity. I mean in theory, isn’t it the same as we use the average nominal cost and adjust it using discount factor?

    Thanks.

    • I am sorry but I don’t know what you are suggesting.

      We are not adjusting anything – we are calculating the PV for one cycle (which is the equivalent outlay at time 0) and then given that the cycle will be repeated to infinity we are calculating the outlay per year that would be equivalent so that we are able to compare the different replacement cycles.
      I can only suggest that you watch the lecture again.

  8. Hi Mr. Moffat,

    I did not get the difference between the NPV ($72.972) and the EAC ($44.878) replacing the machine every 2 years for ever.

    And what figure guide us to the decision is comparing the NPV of $72.972 and $87.101 or the EAC of $44.878 and $38.152.

    Thanks in advance Sir.

  10. A very good lecture indeed!

    I understand that you mentioned there’s still another method of dealing with asset replacement in mutually exclusive projects with unequal lives. Would that be the replacement chain method using the shortest common multiple of the alternatives’ lifes? And if so, is it included in the Dec 2013 Syllabus or there’s no point bothering with it?

  11. Sir, some text books solved the problem without using the maintenance cost in year one, and i don’t know if that is correct and beside there was no assumption stated . Please kindly expatiate on this issue

    • I think you might be referring to an example in the Kaplan book. If you are then it specifically says that the maintenance is paid in the following year.
      There is no specific issue involved – as always with operating cash flows, you assume that the first years cost is payable in one years time i.e. at time 1, unless you are told differently.

      • Thank u Prof. . U are a wonderful teacher
        i wish u were the teacher for all the courses ,
        cos your passion for teaching makes us to understand the course
        the more.

  15. sir.in KAPLAN BOOK.. they say that and i quote…”note that the asset is only maintained at the year end if it isto be kept for a further year i.e ther are no maintaince cost in the year of replacement…”… but u have included running cost in year of disposal or scrap….plese guide me..im bit confused……………………reply promptly…..i will be obliged

    • @faizan1185, Your quote is not a general rule – it is just part of that particular question.

      You will always have running costs in the year of replacement (otherwise the machine will not be working in the final year!) and you will usually also have maintenance costs in the final year as well.

      Think about a car – if you replace it at the end of a year then you will still have to pay for running it during that year and for repairing (maintenance) during that year!

      Always assume this unless the question says differently. The question you are referring to in Kaplan specifically tells you to do differently (although it is unusual for it to say that) and so you do what you are told.

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