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Good day all,
I’m a little concerned with regards to using a calculator over wasting time doing multiple discount factor calculations, problem explained in below example:
EG. A project requires an investment of $2.4 mil with the following cash flows (@ 10%):
Y1 – 500 000
Y2 – 700 000
Y3 – 900 000
Y4 – 450 000
Y5 – 200 000
Calculate the NPV (round to the nearest $000)
NPV = 259 850 (Using discount factor)
NPV = 259 218 (Using Texas instruments BA2 plus – certified to use in CIMA exams)Now needing to round these two figures as required the discount factor calculation would be rounded to $260 000, while the calculator would be rounded to $259 000. That’s a whole $1 000 difference and would surely be incorrect…
Do I really need to waste time and do calculations manually… any advise would be greatly appreciated.
The discount factors in the tables are already rounded for you. Where possible you should use these tables – rather than your own calculated discount factors.
When CIMA examiners are writing the questions they are aware of potential rounding issues – such as the one you have described – so will ask for answers to be stated to nearest whole number – or will provide a multiple choice option – in which you can pick the closest result.
Hope this helps
Cath
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