Sir do you have any video regarding joint probabilities? BPP material contains all problems regarding joint probabilities. And I’m not understanding it.

ZSE Co is concerned about exceeding its overdraft limit of $2m in the next two periods. It has been experiencing considerable volatility in cash flows in recent periods because of trading difficulties experienced by its customers, who have often settled their accounts after the agreed credit period of 60 days. ZSE has also experiences an increase in bad debts due to a small number of customers going into liquidation. The company has prepared the following forecasts of net cash flows for the next two periods, together with their associated probabilities, in an attempt to anticipate liquidity and financing problems. These probabilities have been produced by a computer model which simulates a number of possible future economic scenarios. The computer model has been built with the aid of a firm of financial consultants. Period 1 cash flow Probability $’000 8,000 10%, 4,000 60%, -2000 30%

Period 2 cash flow PROBABILITY

7000 30% 3000 50% -9000 20%

ZSE Co expects to be overdrawn at the start of period 1 by $500,000. Required (a) Calculate the following: (i) The expected value of the period 1 closing balance (ii) The expected value of the period 2 closing balance (iii) The probability of a negative cash balance at the end of period 2 (iv) The probability of exceeding the overdraft limit at the end of period 2 Discuss whether the above analysis can assist the company in managing its cash flows.

part 1 and 2 some how I did and accumulative answer of period 1 n 2 is 3.9 million but part 3 and 4 is confusing.. in BPP its giving concept of joint probabilities.

this is my first time to register for ACCA and am going to start with F5&9 in june sitting kindly advise on how i can prepare myself and increase chance of passing

Sir here in the example 2 cost of capital is 20% so we discount it at 20%. What if it was mentioned that cost of capital is 20 % before tax and corporation tax is 30%. Should we then discount at 14% ( cost of capital after tax) ?

Yes you would discount at 14%. however it is unlikely that a question would say that (you will discover why when you come to the lectures on cost of capital 🙂 )

From example 2, you have deducted fc from d flow, do we just apply the annuity df to the cashflow bal of 125 each or individually? Can we also use pv df? I dont know if you get my question

You can either discount each flow separately or you can discount the equal flows using the annuity factor (and the other flows separately). You will get the same end result either way.

When there is an annuity, as there is here, for the contribution and fixed overheads (they are both an equal amount a year (i.e. an annuity) for each of 4 years) it is quicker to use the annuity discount factors. By all means discount the net flow for each year individually using the normal present value factors and you will get the same answer (apart from rounding differences in the tables, which is irrelevant for the exam), but it takes a bit longer.

I have no idea how on earth you got 1394.83 – it is simply not possible to invest 200,000 and then get back a net 125,000 a year for 4 years and end up with an NPV that low! The answer of $147,725 is correct 🙂

The video is working fine. The problem is at your end – try clearing your cache, or using a different browser.

If that does not work then you need to contact your IT people (if you are at work) or your internet provider. It is probably the firewall settings that are causing your problem. What just might work is disconnecting from your network and then re-connecting.

Yes – for simulation only writing. Risk adjusted discount rate could be only writing, but it is effectively Capital Asset Pricing Model (where there certainly will be calculations) but that is covered later in the Course Notes / lectures.

Seems That I am Learning F5 Again 😀 thanks Sir for a great Lecture but there is something I am a bit confused here, In your Notes The Wording for this Question are “and expects fixed overheads to increase by $140,000 per year”, May be Its silly but don’t you think that fixed overheads must increase or summed up by $140,000 Every year that is $140,000 in year 1, 280,000 in year 2 and so on……..? I just asked according to the wordings of your OT notes!

N.B I am not a native English Speaker so please do correct me Mistakes

The OpenTuition notes are worded in the same way as the wording in the exam – he has written this several times.

If the overheads are currently (say) 100,000 per year, and they increase by 140,000 per year, then it means that they become 240,000 per year (not that they increase every year).

(If your salary is 10,000 per year, and I tell you I am giving you a pay increase of 1,000 per year, surely you expect to get 11,000 per year – not automatically an increase of another 1,000 every year? 🙂 )

I am not a native English speaker either but/and the wording is really confusing.

Regarding the example you have mentioned I would understand an increase of £1000 every year. However if you say “increase the annual salary by £1000” means for me what you have meant to say.

Am I wrong? May this be a matter of argument in an exam?

In part b, i calculated expected fixed overhead as 117500.Since it is not mentioned as fixed overhead expect to increase,should it include in each year ?

@johnmoffat, If it says p.a, will we do the same as this example? What words will the examiner use if we are expected to inflate each year? Thank you 🙂

@abeers, Yes – if it says p.a. then you would do the same as in this example. If he wanted you to increase it each year he would say ‘….increase by 140,000 in each subsequent year’.

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rishabbohra98 says

Sir do you have any video regarding joint probabilities? BPP material contains all problems regarding joint probabilities. And I’m not understanding it.

misbahkiran says

ZSE Co is concerned about exceeding its overdraft limit of $2m in the next two periods. It has been experiencing considerable volatility in cash flows in recent periods because of trading difficulties experienced by its customers, who have often settled their accounts after the agreed credit period of 60 days. ZSE has also experiences an increase in bad debts due to a small number of customers going into liquidation.

The company has prepared the following forecasts of net cash flows for the next two periods, together with their associated probabilities, in an attempt to anticipate liquidity and financing problems. These probabilities have been produced by a computer model which simulates a number of possible future economic scenarios. The computer model has been built with the aid of a firm of financial consultants.

Period 1 cash flow Probability

$’000

8,000 10%, 4,000 60%, -2000 30%

Period 2 cash flow PROBABILITY

7000 30% 3000 50% -9000 20%

ZSE Co expects to be overdrawn at the start of period 1 by $500,000. Required

(a) Calculate the following:

(i) The expected value of the period 1 closing balance

(ii) The expected value of the period 2 closing balance

(iii) The probability of a negative cash balance at the end of period 2

(iv) The probability of exceeding the overdraft limit at the end of period 2

Discuss whether the above analysis can assist the company in managing its cash flows.

part 1 and 2 some how I did and accumulative answer of period 1 n 2 is 3.9 million but part 3 and 4 is confusing.. in BPP its giving concept of joint probabilities.

misbahkiran says

Question 82

000 $

Period 1 NPV

0 -500 -500

1 8000 0.1 800

2 4000 0.6 2400

3 -2000 0.3 -600

Expected value 2100 1909

Period 2

0

1 7000 0.3 2100

2 3000 0.5 1500

3 -9000 0.2 -1800

1800 1488

John Moffat says

In future please ask this sort of question in the Ask the Tutor Forum and not as a comment on a lecture.

You can find a lecture working through the whole of this question linked from this page:

https://opentuition.com/acca/f9/acca-f9-revision-kit-live/

nduwayezu says

Dear sir

this is my first time to register for ACCA and am going to start with F5&9 in june sitting kindly advise on how i can prepare myself and increase chance of passing

John Moffat says

Please ask this sort of question in the Ask the Tutor Forum, and not as a comment on a lecture 🙂

sazia says

Hello Sir,

Is there any lecture on joint probabilities?

Many thanks in advance.

John Moffat says

No – they are not likely in F9.

rakhi2rakhi says

Sir here in the example 2 cost of capital is 20% so we discount it at 20%. What if it was mentioned that cost of capital is 20 % before tax and corporation tax is 30%. Should we then discount at 14% ( cost of capital after tax) ?

John Moffat says

Yes you would discount at 14%. however it is unlikely that a question would say that (you will discover why when you come to the lectures on cost of capital 🙂 )

Oladipo says

Hello John,

From example 2, you have deducted fc from d flow, do we just apply the annuity df to the cashflow bal of 125 each or individually? Can we also use pv df? I dont know if you get my question

John Moffat says

You can either discount each flow separately or you can discount the equal flows using the annuity factor (and the other flows separately).

You will get the same end result either way.

Oladipo says

Thank you

John Moffat says

You are welcome 🙂

vandananair says

Sir i did not understand why we use annuity here and my answer for part a) is 1394.83 whereas in the answers the answer is given as 147725

John Moffat says

When there is an annuity, as there is here, for the contribution and fixed overheads (they are both an equal amount a year (i.e. an annuity) for each of 4 years) it is quicker to use the annuity discount factors.

By all means discount the net flow for each year individually using the normal present value factors and you will get the same answer (apart from rounding differences in the tables, which is irrelevant for the exam), but it takes a bit longer.

I have no idea how on earth you got 1394.83 – it is simply not possible to invest 200,000 and then get back a net 125,000 a year for 4 years and end up with an NPV that low!

The answer of $147,725 is correct 🙂

vandananair says

Thanks a lot sir ?.I was confused and therefore messed it up.

vandananair says

sir i used 2.589 as annuity factor in all the years from 1-4 but still not getting the answer please help

John Moffat says

But the answer (and the workings) are shown in full in the free lecture notes.

jevoqiao says

is there something wrong with the video?it’s not chapter 10 part 2 but still chapter 9 lease vs

buy

John Moffat says

The video is working fine.

The problem is at your end – try clearing your cache, or using a different browser.

If that does not work then you need to contact your IT people (if you are at work) or your internet provider. It is probably the firewall settings that are causing your problem.

What just might work is disconnecting from your network and then re-connecting.

acca2050 says

ok you mean, investment appraisal will involve writing question for simulation and risk adjusted discount rates, if there any comes?

John Moffat says

Yes – for simulation only writing. Risk adjusted discount rate could be only writing, but it is effectively Capital Asset Pricing Model (where there certainly will be calculations) but that is covered later in the Course Notes / lectures.

hamzaharoon says

Seems That I am Learning F5 Again 😀 thanks Sir for a great Lecture but there is something I am a bit confused here, In your Notes The Wording for this Question are “and expects fixed overheads to increase by $140,000 per year”, May be Its silly but don’t you think that fixed overheads must increase or summed up by $140,000 Every year that is $140,000 in year 1, 280,000 in year 2 and so on……..? I just asked according to the wordings of your OT notes!

N.B I am not a native English Speaker so please do correct me Mistakes

Thanks

John Moffat says

The OpenTuition notes are worded in the same way as the wording in the exam – he has written this several times.

If the overheads are currently (say) 100,000 per year, and they increase by 140,000 per year, then it means that they become 240,000 per year (not that they increase every year).

(If your salary is 10,000 per year, and I tell you I am giving you a pay increase of 1,000 per year, surely you expect to get 11,000 per year – not automatically an increase of another 1,000 every year? 🙂 )

hamzaharoon says

Ok Sir I Understood, Thank you very Much 😀

Janos says

I am not a native English speaker either but/and the wording is really confusing.

Regarding the example you have mentioned I would understand an increase of £1000 every year. However if you say “increase the annual salary by £1000” means for me what you have meant to say.

Am I wrong? May this be a matter of argument in an exam?

John Moffat says

I understand the problem, but has been common wording in the exam.

However, the examiner did realise last time he used these words that it confused many people, so I think he will make it more clear in future.

laajumathew says

In part b, i calculated expected fixed overhead as 117500.Since it is not mentioned as fixed overhead expect to increase,should it include in each year ?

allamardneket4 says

expected overheads 158000. not 117500. 😛

suthan says

Nice lecture…..

tilamani says

Thank you Open Tuition. Good delivery on the lecture.

marisa101 says

thank you.

Atif Munir says

It is mentioned in Example 2: “and expects fixed overheads to increase by $140,000 per year”

But in video it is 140000 each year we are deducting from contribution. Why is that? Should not we deduct 140000 year1, 280000 year 2 and so on.??

John Moffat says

@Atif Munir, No. If it meant that it would have said “…to increase by $140,000 in each subsequent year”

abeers says

@johnmoffat, If it says p.a, will we do the same as this example?

What words will the examiner use if we are expected to inflate each year?

Thank you 🙂

John Moffat says

@abeers, Yes – if it says p.a. then you would do the same as in this example.

If he wanted you to increase it each year he would say ‘….increase by 140,000 in each subsequent year’.

abeers says

@johnmoffat, Yaay! Thanks (^_^)

John Moffat says

@johnmoffat, You are welcome 🙂

praveenkaur says

Thanks a mil.

admin says

it should be OK now,

musema says

It says this lecture is on Expected values but plays capital rationing. Some problem or is it me?

sunny84 says

Good lecture for EV, but i dont understand this Simulation thing. Where can i find lectures regarding that? 🙁