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FM Chapter 7 Questions – Investment appraisal – methods

 

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  1. 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?

  3. 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

    • 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!!!)

  5. 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?

    • 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!

  7. 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!

    • 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.

    • 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)

    • 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 🙂 )

    • 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.

  12. 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.

  14. 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?

  17. 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?

  19. 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

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