Discounted Cash Flow Further Aspects, Capital Rationing – ACCA Financial Management (FM)
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Thank you so much sir for this lecture. I love your style of teaching, it is 3asy to follow and understand.
Thanks to OpenTuition too for making the free lecture possible.
Thank you for your comment 馃檪
Greetings sir.
Why for indivisible one , we cannot follow the previous rule of npv divide by capital invested – to spot the real benefitting cashflows ? Yes, we can then ignore the last least beneficial one instead of doing the pro rata of it, because its not divisible. Why do we totally follow a new method – of adding all the npvs together ? Why didnt we follow this formula for the divisible one, and why not the formula of the divisible one for indivisible one – to be consistent ? The only change we would have made then was either to ignore the last block or pro rata it, but the technique of both should have been the same !
It will not always give the same result, and so you cannot do it that way.
(If you could only invest a small amount in the one with a higher NPV per $, it could be better to be able to invest a greater amount in one with a slightly lower NPV per $.)
Hi Sir, certain study texts calculate the profitability index by taking PV of inflows/PV of outflows. However you took NPV/Investment. Which is right?
Both are acceptable – the examiner accepts either (and obviously the ranking is not affected).
Hi Sir, were they to give a working capital investment, would that count as an outflow therefore we take the NPV/(Initial investment + Working Capital) ?
Yes you would.
Thank you for the amazing lectures. I am a bit confused here, in the example 1- we are given with NPV @10% in the notes. but you took the NPV as 100% while calculating the total NPV. What am I missing here ?
The NPV given in the study text is already calculated at 10%. 10% given there does not mean that we should take that fraction of the total but it means that after calculating the outflows and inflows our present value has been discounted by the rate of 10% giving us the NPV totals of 50, 57, 36 and 50 for each of the project. Take project 1 as an example, you discount each of the inflows using present value table at 10% giving you 201 for year 1, 183 for year 2 and 166 for year 3, take away the original investment of 500 and you are left with the NPV of 50 (subject to small rounding).
1:48 mr.Mofat your hilarious 馃榾
馃檪
I liked the 1:48 part also.
Hello Mr. Moffat,
Thanks for your well explained lecture, I just slipped the idea behind the selection of the best possibility for part c of example 1
why didn’t we assume the same like in part b and would have chosen also based on the NPV per $ invested so that our answer to be directly D + C + A ?
can you explain that sir.
We only use NPV/$ when the projects are divisible. In part (c) they are not divisible – we either do all of the project or none of it – and therefore we can only take the approach I use in the lecture.
Thank you for this one John. I always enjoy watching your video lectures.
It needs study and practice.
Watch all of my lectures and then practice every question in your Revision Kit and learn from your mistakes.
If you have a problem then ask in the Ask the Tutor forum.
Why is it so hard to pass FM exam?What’s the possible best approach to pass this exam?
Thank you I am currently using your lectures and notes.Thank you.
THREE RULES TO PASSING!!
1 .PRACTICE!!!
2. PRACTICE!!
3. AND PRACTICE!!