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.

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.

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.

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…

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.

Oshedu says

Hello,

Please in question 5, a 2yr AF was used instead of a 2yr DF. Why is that so please?

John Moffat says

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.

Morrison240 says

Hi Sir,

In question 1, why was the cash inflow added back.

John Moffat says

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.

Morrison240 says

Very clear,? since the inflow is at time 0.

Thank you sir, all good.

John Moffat says

You are welcome 🙂

Pratibhapahwa4313 says

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!

John Moffat says

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.

Pratibhapahwa4313 says

Yes sir, I went back and watched the lectures again and understood the whole point.

Thank you 🙂

John Moffat says

You are welcome 🙂

asher2019 says

100% score. Helpful questions. Thanks John

John Moffat says

You are welcome 🙂

herna05 says

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?

John Moffat says

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.

herna05 says

Thank you. Will go over the lecture for f2

Shivangi says

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…

asher2019 says

Thanks

andrea91 says

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.

John Moffat says

The difference is due to the fact that the tables are rounded to 3 decimal places. It is irrelevant in the exam.