FM Chapter 7 Questions – Investment appraisal – methods
102 Comments
R
roastedgrilledcheese·
excuse me sir, could you please explain why is number 4's answer of "the graphical approach to IRR is only an estimate; linear interpolation is required for a precise answer?" Does this mean that calculating the IRR using the linear interpolation would only give estimates as well? So, which method would give IRR a precise answer Sir? Or is there none?
J
John MoffatTutor·
Linear interpolation only gives an estimate. To get a precise answer we would need to draw a graph. So that is why both statements in this option are false. I do explain this in my free lectures - have you not watched them? :-)
Best of all to get a precise answer is to use the IRR function in a spreadsheet such as excel, but this is not relevant until Paper AFM.
M
Marian·
I am a bit confused as to why question 1 is 12000*12000/0.11 because i know finding perpetuity is the cashflow multiplied by the discount factor 1/r so 12000*1/0.11
J
John MoffatTutor·
1/r is the discount factor for a perpetuity starting in 1 years time. Here the first receipt is immediate and so the PV of that receipt is 12,000 which needs to be added on to the PV of the perpetuity.
So the total PV is 12,000 + (12,000/0.11)
S
Sok Leng Do·
Thank you for your explain !
M
mario·
I dont know if you still reply to comments but for question 4 I did the graph and it is negatively sloped, showing that as interest increases the npv decreases or does the interest not mean Cost of capital in this situation?
J
John MoffatTutor·
The IRR is the rate of interest at which the NPV of the project is zero. It is not the cost of capital.
M
mario·
Yes thanks, I realized the questions didn't ask about irr. Thanks for the lectures, just did my exam today. Only thing I didn't like were section a and b questions they should take in to consider calculations or give u part marks because some were confusing.
R
Ramabone·
The graph is ploted npv against against interest rates i think it is indeed negatively sloped... NPV on y-axis and intetest rates on x-axis...
Please Sir advise whre iam getting it wrong?
N
NguyenSupporter·
Dear Sir,
I'm really sorry bother you. I have tried to understand the last question, but i can't. Iam confused about last answer.
The question : what is the present value of 48.000( fist receivale in 3 years time) + 48.000 (receive 7 times from 4th year - 10th year).
So, the total = we'll receive total = 8 times for 48.000 (ignore cost captial).
But the answer just give present value of 7 times for 48.000.
Amount 10%
0-2 48000 -----------
3 48000 36,063.11
4 48000 32,784.65
5 48000 29,804.22
6 48000 27,094.75
7 48000 24,631.59
8 48000 22,392.35
9 48000 20,356.69
Sum 193,127.36 .
Why don't we caculate Present value for the fist receivabe?
K
Khushi·
at the end of 3rd year we will receive 48000 and thereafter we will receive it for 7 years more. The amount which we received in 3rd year is return for the 3rd year as we assume that we receive the cash flow at the end of the year therefor we are not receiving the 48000 for first 2 years.
remaining 7 years we will count from 3, 4 , 5 till 9th year
annuity for 9 years is 5.759 we will deduct first 2 years annuity in which we are not generating income.
Therefore 5.759-1.736 which is annuity for 2 years
we get 4.023*48000 which is 193104.
I hope you understood.
D
Dhanvanth·
Here the first receipt is received in 3 years time ie at the end of 3rd year(t3).
And continues for a period total of 7 years( t3,t4,t5,t6,t7,t8,t9).
This case is delayed annuity so the answer can be arrived by using the formula Pv= Annuity cf * annuity factor* Discounting factor
so 48000*4.868*0.826
Here the annuity factor means , annuity factor of number of years the payment is received ie 7yr
And discounting factor of previous year when the first payment is received ie (t2)
B
Bhavika·
Hello Sir, I really enjoy your lectures! Thankyou! :)
J
John MoffatTutor·
Thank you for your comment :-)
M
Mark·
I got 3 out the 5 questions right but I found the mistakes I was making were not technical but where I hadn't taken the time to read the question and rushed to answer it. For example in the last question I added up the periods wrong calculated from year 3 to 10 instead of 3 to 9 because I read 7 as being 7 more years rather then a total of 7 years which in the exam would cost me 2 marks. It pays to take your time even if you think you know the how to answer it!
J
John MoffatTutor·
That is very true!
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Vikram·
Quiz help us to revise and clear the concept
E
Emmanuel Mashaya·
i have a tiny little problem with regards to counting the number of periods.
When we say 'in three years' time , shouldnt it be any period which falls within the third period???rather than what i am seeing within the examples 'in three years time = time period 2'
Example
What is the present value of $48000 first receivable *in three years time* and thereafter each year for a total period of seven years?
Cost of capital is 10%
J
John MoffatTutor·
As I explain in my free lectures, we only ever discount cash flows that are whole years apart.
In three years time means time 3.
For your example, the annuity runs from time 3 to time 9, and to get the discount factor we take the 9 year annuity factor and subtract the 2 year annuity factor in order to be left with the factor for 3 to 9.
If you are unsure about this then do watch the free Paper MA lectures on discounting, because this is revision from Paper MA.
E
Emmanuel Mashaya·
Thank you very much for the clarification.
J
John MoffatTutor·
You are welcome.
D
Dhanvanth·
in three years time means at the end of 3rd year ie t3
J
John MoffatTutor·
Yes - just as I have written in my earlier reply!
S
Shivvy·
Im in dilemma! normally when you discount a cash flow at suppose 11%, should not it be 0.901 multiply by 12000 = 10812 like we do for the other PV calculation then why it used PV= CF (1+1/r), this perplexes me with the Future CF
J
John MoffatTutor·
The discount factor for a perpetuity is 1/r, where r is the rate of interest. However that applies for a perpetuity that starts in 1 years time. In this question (and I assume you are referring to question 1, but you have not said!), then the first receipt is immediate rather than in 1 years time, and the PV of a flow receive immediately is the amount of the flow.
This basic discounting is revision from Paper MA (was F2) and I suggest that you watch the free Paper MA lectures on interest and on investment appraisal (as well as the Paper FM lectures).
S
Shivvy·
Can plz explain the NPV for the discounting 10% and 15% as I cant find it...
J
John MoffatTutor·
I assume that you are referring to question 3. If you submit your answers and then click on 'review quiz' the answers and workings will appear.
(I do assume that you watched the free lectures on investment appraisal before attempting the quiz?)
S
Shivvy·
Sorry I did not mention the ques num. but in any way for the ques 3, I got it right but at 15%, NPV= +0.338 m when its 0.343m
Also, using the formula of IRR, the nominator stands the lowest NPV but here, it is the +ve NPV
My answer = 17.82%
J
John MoffatTutor·
If you are using the tables provided then the NPV at 15% is 0.343m as stated in the answer. If you are not using tables then the answer will be slightly different because the tables are rounded to 3 decimal places, but rounding is irrelevant in the exam (just as in real life).
17.82% is not one of the answer choices available. Just as in the exam the question is expecting you to use the nearest answer.
You should not be using a formula to calculate the IRR but should understand what we are doing, as I explain in my lectures. The examiner is always trying to set questions that check you understand and have not simply learned rules. You will see plenty of the sort of questions I mean in your Revision Kit.
A
aribasiraj·
Sir.. I want to ask how can i get ready for april attempt... I dont know how to get prepare myself for Financial management paper..please help me out.. I m really nervous regarding thoery and all
J
John MoffatTutor·
In future please pose this kind of question in the Ask the Tutor Forum and not as a comment on a test.
There is no exam session in April so I don't know whether you are meaning March or June.
You need to study by watching all of our free lectures, and then you need to practice by buying a Revision Kit from one of the ACCA Approved Publishers and attempting every question in it.
M
Maddie·
Sir, I have a doubt pertaining to the 4th question.
Why is the statement "A graph showing NPV on the Y axis and Interest rate on the X axis will have a negative slope," not true? Please could you help me understand?
(I agree that the statement "Two NPVs are required to estimate IRR using linear interpolation," is true. I was just wondering if there were two true statements).
Thank you!
J
John MoffatTutor·
There can be more than one IRR in which case the slope of the curve will be negative in some places and positive in others.
J
Juliana·
Hello,
Please in question 5, a 2yr AF was used instead of a 2yr DF. Why is that so please?
J
John MoffatTutor·
The flows are from time 3 to 9.
You can do it in either or two ways:
The 9 year annuity factor less the 2 year annuity factor will leave us with the total factor for 3 to 9.
Alternatively, you can take the 7 year annuity factor and then discount for 2 years because the annuity starts 2 years late.
Both approaches give the same answer (any small difference is simply due to rounding in the tables).
I do explain this in my free lectures.
M
mangto·
I'm not sure why discount for 2 year instead of 3 year, sir?
E.g, the second one, why not discount for 3 years as the title saying that the amount from 3 year but 2 years?
J
John MoffatTutor·
Multiplying by the 7 year annuity factor gives the PV 'now' for an annuity starting in 1 years time.
The annuity starts in 3 years time, which is 2 years later than 1 years time. Therefore the annuity factor gives the PV two years later - i.e. time 2 instead of time zero and therefore we need to discount it for 2 years to get the PV 'now'.
M
Morrison·
Hi Sir,
In question 1, why was the cash inflow added back.
J
John MoffatTutor·
Using a discount factor of 1/r for a perpetuity gives the PV when the first inflow is in 1 years time.
Here the first inflow is immediate i.e. at time 0, and the PV of $12,000 at time 0 is $12,000.
Therefore this needs adding to the PV of the perpetuity.
If you are still at all unsure then look back to the Paper MA (was F2) lectures on discounting, because this is revision of Paper MA.
M
Morrison·
Very clear,? since the inflow is at time 0.
Thank you sir, all good.
J
John MoffatTutor·
You are welcome :-)
P
PratibhaSupporter·
Sir, could you please explain why the IRR would not change even if there is change in the cost of capital. (referring- question 2)
I totally messed this question up!
Thanks in advance!
J
John MoffatTutor·
By definition, the IRR is the rate of interest at which the NPV is zero.
The cost of capital is of no relevance in the calculation. It is only relevant if we are using an IRR approach to decide whether or not to invest - it the IRR is greater than the cost of capital the project is worthwhile. If the IRR is less than the cost of capital then the project should be rejected.
Did you watch my free lectures before attempting this test? If you did and are still not clear then watch also my free Paper MA (was F2) lectures on the IRR because this is revision from Paper MA.
P
PratibhaSupporter·
Yes sir, I went back and watched the lectures again and understood the whole point.
Thank you :)
J
John MoffatTutor·
You are welcome :-)
A
Asher·
100% score. Helpful questions. Thanks John
J
John MoffatTutor·
You are welcome :-)
H
Herna·
quest 3
In the example we find the difference between the upper and lower 5 and same for the NPv. why do add the 2 NPVs amount in this question?
J
John MoffatTutor·
The difference between + 0.343 and - 0.2659 is the sum of the two (or if you want to be mathematical (although this is not a maths exam) subtract a negative number is the same as adding the number).
I do suggest that you watch my free lectures on this and if necessary my Paper MA (was F2) lectures on discounting, because this is revision from Paper MA.
H
Herna·
Thank you. Will go over the lecture for f2
S
Ster·
This might be a silly question, but when I was calculating the NPV in Question 3 for 20%, I accidentally got a positive net present value which ofcourse, messed up my IRR. Fixed that, no worries.
But would they ever ask us to use two discount rates which BOTH give a positive NPV to calculate the IRR? Or do you need the second discount rate to result in a negative NPV for IRR calculations...
A
Asher·
Thanks
A
andrea91·
HI Sir,
I have a question about the question n.5: I have tried to carry out the excercise using (for the 2 years) both the annuity for two years (1.736) and also calculating yearly with the annual discount (0.877and 0.756) but I arrive a two different results. In the first case with the annuity the amount is 83,328 (48,000 * 1.736), menawhile in the second case the amount is 83,280 (43,632+39,648). am I making a mistake? I was expecting the calculation to have the same result.
Thanks in advance.
J
John MoffatTutor·
The difference is due to the fact that the tables are rounded to 3 decimal places. It is irrelevant in the exam.
A
annmary1·
Hi sir, could you please help me solve this question?
(a)If a project involved the outlay of $1000 today and provided a definite return of $1001, for the foreseeable future, would you accept it if you could get a return of 5% on investments of similar risk?
(b) What if the project gave a return of $1001 per year for a foreseeable future, starting in 3 years time?
J
John MoffatTutor·
Ask this sort of question in the Ask the Tutor Forum - not as a comment on a test.
H
hameedy·
thanks
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patience musarurwa·
Tichtop Ltd is considering investing $80 million in equipment which
will generate a net cash flow of $32 million per year for four years.
The company is able to depreciate the equipment at rate of 20% per
year on a straight line basis for tax purposes. The market value of
the equipment at the end of four years is expected to be $30 million.
The difference between the market value and the equipment’s tax value
is subject to tax. The corporate tax rate is 28% and the company’s
cost of capital is 14%.
Calculate:
(a) the project’s NPV
(b) the project’s IRR
(c )the project’s MIRR
( d ) the project’ pay back
this is my due assignment and i have no clue on how to write it please help
S
sieness·
this is a p4 question?? MIRR only available in p4 as i know
J
John MoffatTutor·
Sieness is correct - MIRR is not examined in Paper FM.
Also, we do not do assignments for people. If you are taking AFM The new name for Paper P4) and do not understand what is mean by MIRR then watch my free AFM lectures and ask in the AFM Ask the Tutor Forum if anything is not clear (but don't expect me to do you homework for you!!!)
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Rishab Bohra·
I do not quite understand Q4 – could you please explain why the statement about a graph with NPV on “Y” and interest rate on “X” – wouldn’t it have a negative slope?
J
John MoffatTutor·
If it is an outflow followed by inflows, then yes - it would have a negative slope. But if, for example, it was an inflow followed by outflows, then it would have a positive slope :-)
K
Kate·
Hello, could you please help me with this investment appraisal -allowing for tax and inflation. If a question reads ( A project has the following projected cash inflows
Year 1 $100,000
Year 2 $125,000
Year 3 $ 105,000
Working capital is required to be in place at the start of wach year equal to 10% of the cash inflow for that year. The cost of capital is 10%.
What is the present value of the working capital?
How do you go about answering it?
J
John MoffatTutor·
Please ask in the Ask the Tutor Forum and not as a comment on a test.
However, have you not watched the free lectures? I work through a very similar example in the lecture on relevant cash flows for investment appraisal, explaining how to answer it!
R
Rasik Sharma·
In question 5,
thereafter each for 7 years should mean upto 10 years isn't it. i.e 3 + 7 =10
J
John MoffatTutor·
No.
The first receipt is in 3 years time, the second is in 4 years time, and so on.
If you carry on counting (use your fingers) you will find the 7th receipt is in 9 years time.
J
Justyna·
Dear John,
I do not quite understand Q4 - could you please explain why the statement 'There is only ever one IRR' is not correct?
And also the statement about a graph with NPV on "Y" and interest rate on "X" - wouldn't it have a negative slope?
Thank you!
J
John MoffatTutor·
For a conventional set of cash flows (i.e. an outflow followed by a series of inflows) then there will be only one IRR and there will be a negative slope.
However, if there is more than one change of sign (e.g. outflow followed by inflows followed by outflow) then there can be more than one IRR and the graph will be a curve with an upward and a downward slope.
This is one of the standard possible problems with using IRR and I do explain it in the free lecture.
J
Justyna·
Thank you! Now I get it :)
J
John MoffatTutor·
That's good :-)
K
karan·
sir,
in question 3 how do you converted 266 in 0.266?
J
John MoffatTutor·
I don't know what you mean.
The NPV at 20% is -0.266. I haven't converted anything.
(It is actually of course -266,000, and the NPV at 15% is actually +343,000, but using those figures will obviously give exactly the same answer with more messaging around)
H
Helen·
Please sir, can you explain question 5
J
John MoffatTutor·
Have you watched my free lectures on this? (Because there is no point in attempting the tests if you have not watched the lectures!)
If you have watched the lectures then you will know that the 10 year annuity factor is the total of the discount factors for years 1 to 10.
If we subtract the 2 year annuity factor (which is the total of the discount factors for years 1 to 2), the we are left with the total of the factors for years 3 to 10, which is what we want :-) )
C
Cynthia·
i still don't get question 1.
could you please explain it again?
J
John MoffatTutor·
The discount factor for a perpetuity is 1/r (which in this case is 1/0.11).
However this gives the present value when the first receipt is in 1 years time - so 1 to infinity.
In this question the first receipt is immediate - time 0 - and then we get receipts for 1 to infinity.
The PV of a receipt at time 0 is the amount of the receipt, and so to get the total PV we need to add this on.
J
jacinta·
Thank you so much.
D
dolatokun·
Question 3
IRR 20%
I calculated (2400*0.833) + (3100*0.694) + (2100*0.579) + (1800*0.482) = 6234
Less 6500 = 266
Please let me know where I went wrong.
J
John MoffatTutor·
6234 - 6500 = (266), which is the same as in the 'pop-up' answer.
D
dolatokun·
Thank you for all youtr help John
J
John MoffatTutor·
You are welcome :-)
H
hlipschutz·
For question 3, i keep getting 0.343 for the 15% discount factor?
Also why is 0.307 and 0.2659 added together to get the IRR, isn't 0.2659 a minus number?
J
John MoffatTutor·
The NPV is 0.343. It is an error and I will have it corrected.
As far as adding the two NPV's together, the difference between + .307 and - .2659 is the two added together.
The correct answer is IRR = 15% + (0.343 / (0.343 + 0.2659) x 5% = 17.8%
H
hlipschutz·
Thank you so much!
J
John MoffatTutor·
Thank you for spotting the error :-)
A
Achilleas·
Q1: Can you please explain why you add 12,000 to 109,100 (1/0.11*12,000)? Thanks
J
John MoffatTutor·
Because discounting the perpetuity gives the PV when the first flow is in one years time.
In this question the first flow is immediate, and the PV of 12,000 receivable immediately is 12,000.
A
Achilleas·
Thanks a lot John
J
John MoffatTutor·
You are welcome :-)
S
stan15·
Q2: I got $109,100.
Why should we add the $ 12,000 to the $ 109,100. Please help.
Q3: How do you get +0.307 for NPV 15%? I got +0.343 {(-6.5) +2.088+2.3436+1.3818+1.0296}
J
John·
For Q5, currently to work out the DF for a 9 year annuity i am using the tables and adding each year e.g. for 10% 0.909 + 0.826 + 0.751 + ...+ 0.424 = 5.758. However I'm finding this quite time consuming and there is the chance to enter a number incorrectly.
I was just wondering is there a formula that you can you to quickly work out the DF?
J
John MoffatTutor·
Why don't you just use the annuity tables that are provided in the exam? Those tables do it for you!!
I do suggest that you watch our free lectures on this (and the relevant F2 lectures as well if needed, because the discounting itself is all revision of Paper F2).
J
John·
Thanks, its all come back now
J
John MoffatTutor·
You are welcome :-)
M
Myra·
For the third question, how is the npv at 15% and 20% calculated? I'm just not coming up with the answers.
V
Vineeth·
In Question 5 Why is it that the cash inflow period is 3-9 years and not 3-10 years? Is it not the first receivable in 3 years and then add 7 years you get 10.
I have the same doubt in the lecture as well
J
John MoffatTutor·
There are 7 years of flows in total and the first is in 3 years time. So the second is in 4 years time, the third is in 5 years time, and so on. If you carry on counting then you will find that the last of the 7 years of flows is in 9 years time :-)
V
Vineeth·
Oh alright. Thank you :)
J
John MoffatTutor·
You are welcome :-)
V
V·
Sir, why are we taking DCF for 2 years time rather than 3 to subtract from the cumulative DCF for 9 years? Thank you in advance.
S
Sayem·
Wow, its a great practice for me but I always stuck on Theory based mcq's Sir Moffat.
J
John MoffatTutor·
If there are any where you do not understand the answer then do ask in the Ask the Tutor Forum :-)
(and I do assume you are watching our free lectures - they are a complete course for Paper F9)
Best of all to get a precise answer is to use the IRR function in a spreadsheet such as excel, but this is not relevant until Paper AFM.
So the total PV is 12,000 + (12,000/0.11)
Please Sir advise whre iam getting it wrong?
I'm really sorry bother you. I have tried to understand the last question, but i can't. Iam confused about last answer.
The question : what is the present value of 48.000( fist receivale in 3 years time) + 48.000 (receive 7 times from 4th year - 10th year).
So, the total = we'll receive total = 8 times for 48.000 (ignore cost captial).
But the answer just give present value of 7 times for 48.000.
Amount 10%
0-2 48000 -----------
3 48000 36,063.11
4 48000 32,784.65
5 48000 29,804.22
6 48000 27,094.75
7 48000 24,631.59
8 48000 22,392.35
9 48000 20,356.69
Sum 193,127.36 .
Why don't we caculate Present value for the fist receivabe?
remaining 7 years we will count from 3, 4 , 5 till 9th year
annuity for 9 years is 5.759 we will deduct first 2 years annuity in which we are not generating income.
Therefore 5.759-1.736 which is annuity for 2 years
we get 4.023*48000 which is 193104.
I hope you understood.
And continues for a period total of 7 years( t3,t4,t5,t6,t7,t8,t9).
This case is delayed annuity so the answer can be arrived by using the formula Pv= Annuity cf * annuity factor* Discounting factor
so 48000*4.868*0.826
Here the annuity factor means , annuity factor of number of years the payment is received ie 7yr
And discounting factor of previous year when the first payment is received ie (t2)
When we say 'in three years' time , shouldnt it be any period which falls within the third period???rather than what i am seeing within the examples 'in three years time = time period 2'
Example
What is the present value of $48000 first receivable *in three years time* and thereafter each year for a total period of seven years?
Cost of capital is 10%
In three years time means time 3.
For your example, the annuity runs from time 3 to time 9, and to get the discount factor we take the 9 year annuity factor and subtract the 2 year annuity factor in order to be left with the factor for 3 to 9.
If you are unsure about this then do watch the free Paper MA lectures on discounting, because this is revision from Paper MA.
This basic discounting is revision from Paper MA (was F2) and I suggest that you watch the free Paper MA lectures on interest and on investment appraisal (as well as the Paper FM lectures).
(I do assume that you watched the free lectures on investment appraisal before attempting the quiz?)
Also, using the formula of IRR, the nominator stands the lowest NPV but here, it is the +ve NPV
My answer = 17.82%
17.82% is not one of the answer choices available. Just as in the exam the question is expecting you to use the nearest answer.
You should not be using a formula to calculate the IRR but should understand what we are doing, as I explain in my lectures. The examiner is always trying to set questions that check you understand and have not simply learned rules. You will see plenty of the sort of questions I mean in your Revision Kit.
There is no exam session in April so I don't know whether you are meaning March or June.
You need to study by watching all of our free lectures, and then you need to practice by buying a Revision Kit from one of the ACCA Approved Publishers and attempting every question in it.
Why is the statement "A graph showing NPV on the Y axis and Interest rate on the X axis will have a negative slope," not true? Please could you help me understand?
(I agree that the statement "Two NPVs are required to estimate IRR using linear interpolation," is true. I was just wondering if there were two true statements).
Thank you!
Please in question 5, a 2yr AF was used instead of a 2yr DF. Why is that so please?
You can do it in either or two ways:
The 9 year annuity factor less the 2 year annuity factor will leave us with the total factor for 3 to 9.
Alternatively, you can take the 7 year annuity factor and then discount for 2 years because the annuity starts 2 years late.
Both approaches give the same answer (any small difference is simply due to rounding in the tables).
I do explain this in my free lectures.
E.g, the second one, why not discount for 3 years as the title saying that the amount from 3 year but 2 years?
The annuity starts in 3 years time, which is 2 years later than 1 years time. Therefore the annuity factor gives the PV two years later - i.e. time 2 instead of time zero and therefore we need to discount it for 2 years to get the PV 'now'.
In question 1, why was the cash inflow added back.
Here the first inflow is immediate i.e. at time 0, and the PV of $12,000 at time 0 is $12,000.
Therefore this needs adding to the PV of the perpetuity.
If you are still at all unsure then look back to the Paper MA (was F2) lectures on discounting, because this is revision of Paper MA.
Thank you sir, all good.
I totally messed this question up!
Thanks in advance!
The cost of capital is of no relevance in the calculation. It is only relevant if we are using an IRR approach to decide whether or not to invest - it the IRR is greater than the cost of capital the project is worthwhile. If the IRR is less than the cost of capital then the project should be rejected.
Did you watch my free lectures before attempting this test? If you did and are still not clear then watch also my free Paper MA (was F2) lectures on the IRR because this is revision from Paper MA.
Thank you :)
In the example we find the difference between the upper and lower 5 and same for the NPv. why do add the 2 NPVs amount in this question?
I do suggest that you watch my free lectures on this and if necessary my Paper MA (was F2) lectures on discounting, because this is revision from Paper MA.
But would they ever ask us to use two discount rates which BOTH give a positive NPV to calculate the IRR? Or do you need the second discount rate to result in a negative NPV for IRR calculations...
I have a question about the question n.5: I have tried to carry out the excercise using (for the 2 years) both the annuity for two years (1.736) and also calculating yearly with the annual discount (0.877and 0.756) but I arrive a two different results. In the first case with the annuity the amount is 83,328 (48,000 * 1.736), menawhile in the second case the amount is 83,280 (43,632+39,648). am I making a mistake? I was expecting the calculation to have the same result.
Thanks in advance.
(a)If a project involved the outlay of $1000 today and provided a definite return of $1001, for the foreseeable future, would you accept it if you could get a return of 5% on investments of similar risk?
(b) What if the project gave a return of $1001 per year for a foreseeable future, starting in 3 years time?
will generate a net cash flow of $32 million per year for four years.
The company is able to depreciate the equipment at rate of 20% per
year on a straight line basis for tax purposes. The market value of
the equipment at the end of four years is expected to be $30 million.
The difference between the market value and the equipment’s tax value
is subject to tax. The corporate tax rate is 28% and the company’s
cost of capital is 14%.
Calculate:
(a) the project’s NPV
(b) the project’s IRR
(c )the project’s MIRR
( d ) the project’ pay back
this is my due assignment and i have no clue on how to write it please help
Also, we do not do assignments for people. If you are taking AFM The new name for Paper P4) and do not understand what is mean by MIRR then watch my free AFM lectures and ask in the AFM Ask the Tutor Forum if anything is not clear (but don't expect me to do you homework for you!!!)
Year 1 $100,000
Year 2 $125,000
Year 3 $ 105,000
Working capital is required to be in place at the start of wach year equal to 10% of the cash inflow for that year. The cost of capital is 10%.
What is the present value of the working capital?
How do you go about answering it?
However, have you not watched the free lectures? I work through a very similar example in the lecture on relevant cash flows for investment appraisal, explaining how to answer it!
thereafter each for 7 years should mean upto 10 years isn't it. i.e 3 + 7 =10
The first receipt is in 3 years time, the second is in 4 years time, and so on.
If you carry on counting (use your fingers) you will find the 7th receipt is in 9 years time.
I do not quite understand Q4 - could you please explain why the statement 'There is only ever one IRR' is not correct?
And also the statement about a graph with NPV on "Y" and interest rate on "X" - wouldn't it have a negative slope?
Thank you!
However, if there is more than one change of sign (e.g. outflow followed by inflows followed by outflow) then there can be more than one IRR and the graph will be a curve with an upward and a downward slope.
This is one of the standard possible problems with using IRR and I do explain it in the free lecture.
in question 3 how do you converted 266 in 0.266?
The NPV at 20% is -0.266. I haven't converted anything.
(It is actually of course -266,000, and the NPV at 15% is actually +343,000, but using those figures will obviously give exactly the same answer with more messaging around)
If you have watched the lectures then you will know that the 10 year annuity factor is the total of the discount factors for years 1 to 10.
If we subtract the 2 year annuity factor (which is the total of the discount factors for years 1 to 2), the we are left with the total of the factors for years 3 to 10, which is what we want :-) )
could you please explain it again?
However this gives the present value when the first receipt is in 1 years time - so 1 to infinity.
In this question the first receipt is immediate - time 0 - and then we get receipts for 1 to infinity.
The PV of a receipt at time 0 is the amount of the receipt, and so to get the total PV we need to add this on.
IRR 20%
I calculated (2400*0.833) + (3100*0.694) + (2100*0.579) + (1800*0.482) = 6234
Less 6500 = 266
Please let me know where I went wrong.
Also why is 0.307 and 0.2659 added together to get the IRR, isn't 0.2659 a minus number?
As far as adding the two NPV's together, the difference between + .307 and - .2659 is the two added together.
The correct answer is IRR = 15% + (0.343 / (0.343 + 0.2659) x 5% = 17.8%
In this question the first flow is immediate, and the PV of 12,000 receivable immediately is 12,000.
Why should we add the $ 12,000 to the $ 109,100. Please help.
Q3: How do you get +0.307 for NPV 15%? I got +0.343 {(-6.5) +2.088+2.3436+1.3818+1.0296}
I was just wondering is there a formula that you can you to quickly work out the DF?
I do suggest that you watch our free lectures on this (and the relevant F2 lectures as well if needed, because the discounting itself is all revision of Paper F2).
I have the same doubt in the lecture as well
(and I do assume you are watching our free lectures - they are a complete course for Paper F9)