In question 2, we take first rate as 12%, can we assume second rate 13%, is there will be a problem if I assume second rate to be nearest to the first rate?

It would not be sensible at all to use a second rate of 13%. All the four choices are higher than 13% and so obviously the NPV at 13% will still be positive. As I explain in my free lectures the relationship is not linear and choosing 12% and 13% will not give a good approximation at all to the IRR.

sir in payback period question 3 and 4.. shouldnt it be 2years cz 270-230=40/100 +2= 2.4 year nd in question 4 259310-270000/303830 so it’s 3.24 year sir i have watched your lecture twice. and i dont know but im not getting the same answer as in the practice question

please help me solve this…….how will the cash flows look like? able ltd is considering a new project for which the following information is available: initial cost $300000 expected life 5yrs estimated scrap value $20000 addition revenue from the project- $120000per year incremental cost of the project $30000per year cost of capital-10% calculate the NPV?

In future please ask this sort of question in the Ask the Tutor Forum, and not as a comment on a lecture.

There is a cash outflow of 300,000 at time 0. There is an annuity of 90,000 (120,000 – 30,000) per year from years 1 to 5. There is an inflow of 20,000 at time 5.

How do we get 20% in the second question while discounting?I understand the questions given in the notes have given different percentage figures. I don’t understand how to apply it here.

As I explain in my free lectures (and as the answer to this question explains) you can use any two rates of interest – it does not have to be 12% and 20%.

abduaj1997 says

Thank You sir for the free lectures.

I got all answers correct.

Morgan137 says

thanks… Got it

John Moffat says

Good 馃檪

@Bilal-kh says

In question 2, we take first rate as 12%, can we assume second rate 13%, is there will be a problem if I assume second rate to be nearest to the first rate?

John Moffat says

It would not be sensible at all to use a second rate of 13%. All the four choices are higher than 13% and so obviously the NPV at 13% will still be positive. As I explain in my free lectures the relationship is not linear and choosing 12% and 13% will not give a good approximation at all to the IRR.

yusra97 says

sir in payback period question 3 and 4..

shouldnt it be 2years

cz 270-230=40/100 +2= 2.4 year

nd in question 4 259310-270000/303830 so it’s 3.24 year

sir i have watched your lecture twice. and i dont know but im not getting the same answer as in the practice question

nitinpudasaini says

2.4 year means more than 2 years and within 3 years. Similarly, 3.24 years mean more than 3 years and within 4 years.

michaelmugendi says

please help me solve this…….how will the cash flows look like?

able ltd is considering a new project for which the following information is available:

initial cost $300000

expected life 5yrs

estimated scrap value $20000

addition revenue from the project- $120000per year

incremental cost of the project $30000per year

cost of capital-10%

calculate the NPV?

John Moffat says

In future please ask this sort of question in the Ask the Tutor Forum, and not as a comment on a lecture.

There is a cash outflow of 300,000 at time 0.

There is an annuity of 90,000 (120,000 – 30,000) per year from years 1 to 5.

There is an inflow of 20,000 at time 5.

safashaikh19 says

How do we get 20% in the second question while discounting?I understand the questions given in the notes have given different percentage figures. I don’t understand how to apply it here.

John Moffat says

As I explain in my free lectures (and as the answer to this question explains) you can use any two rates of interest – it does not have to be 12% and 20%.

safashaikh19 says

thanks sir!

John Moffat says

You are welcome 馃檪

Alexis says

Any two rates of interest on the table or any two rates of interest from the option given in the question?

John Moffat says

Any two as I wrote before and as I explain in the lectures. If rates are given in the question then it makes sense to make use of them.

waqasnaeem16 says

Why we used operating profits for payback in this question?where payback should be calculated on returns….

John Moffat says

Payback period should be calculated using the cash flows, as explained in our free lectures.

If you are referring to question 1, then the question has given the operating cash flows and not the operating profits.

salardehbashi says

In this question, isn’t the NPV negative?

(33,830)

hanscad007 says

It is positive