Discounted Cash Flows – Net Present Value – ACCA Financial Management (FM)
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Could we not use the NPV excel formula here?
Yes of course – you should use excel. However it is still important to understand the logic, and you can be tested on the logic in Section A of the exam.
Yessir, it is indeed important to understand the logic. Thanks very much for replying and recording the lessons!
keeps telling me to logon to watch the videos but I am logged in. Help
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Please ask in the technical problems forum and someone will be able to help you.
Hi Sir, what’s the difference between effective rate of return and internal rate of return?
The internal rate of return is the rate of interest for which the NPV is zero.
Effective return can mean several things depending on the context.
So term ”discounting” is not value of future money in terms of today, its just adjustment of CF for cost of buying asset at some interest rate? Just to be sure how to use this term in general, not just for this exam. if yes, why not calculate this interest cost on asset value (maybe loan is on asset value)? Great lecture as always!
why 1.1 the percentage is 0.1 i dont understand
If X is the value now, then in 1 years time it will have grown to X + 0.1X which is equal to 1.1 X.
I do suggest that you watch the Paper MA lectures on Interest and on Investment Appraisal, because the basic discounting is revision of Paper MA.
Sir why didnt we include the cost of borrowing 80,000, since this 80,000 was borrowed for this project and we are paying cost for it.
The reason for discounting is to account for the cost of borrowing.
This lecture doesn’t seem to correspond to the chapter 9 example 1 in the AFM notes.
Just wanted to let you know.
Always great lectures though thank you John. You’ve got me through PM, FM and now hopefully AFM 馃檪
Ignore me, for some reason I found my way back to an FM lecture not the AFM. apologies!
馃檪
sir is the cost of capital after tax?
We always use the after-tax WACC when discounting, and the WACC is always after-tax unless a question specifically says otherwise which is not likely.
Hi
Are you not allowed to just calculate everything using a financial calculator?
how do i download lecture videos?
Please sir, what if you solve for 2 projects and you get the NPV for both is negative, how do you conclude?
Neither project is worth doing!
Hi sir,
Have two doubts
1. When real cost of capital and nominal cost of capital is given in the exam question. Which cost of capital is to be used for discounting cash flows (As in past exam questions the examiner has always used nominal cost of capital even after adjusting cash flows for inflation).
2. In one of the questions it was given that initial investment is funded by loan notes in that case the tax savings in case of interest is to be used in calculation of cash flow? however examiner has not used tax savings on interest in cash flows.
Thanks sir in advance
In future you must ask this kind of question in the Ask the Tutor Forum and not as a comment on a lectures.
1. We discount nominal act flows at the nominal cost of capital – this is explained in my lectures on investment appraisal with inflation.
2. It does not matter how the particular investment is financed – we discount at the cost of capital and the interest flows (or tax saved) do not appear in the cash flows because they are accounted for in the cost of capital. Again this is explained in my later lectures.
dear sir, you mentioned that inflation doesn’t influence the calculation of NPV, why? can you explain a little bit more?
What I said was that inflation is not the reason that we discount.
I explain the impact of inflation in the later lectures in the series on investment appraisal.
yes, I will go on learning
馃檪
I would like to know if the reservations highlighted in this video lectures cut across all investment appraisal or does one need to consider the nature of the investment itself, the type of business and industry as a whole before making those reservations.
The reservations are reservations of the DCF technique in general. The nature of the investment etc. might result in extra reservations depending on the circumstances.
Okay sir. Thank you for the clarification.
You are welcome 馃檪
Thanks for this well explained video lecture. A very good start to the remaining chapters ahead.
Thank you for your comment 馃檪