Discounted Payback — OpenTuition Forums

SShane3y ago

I cant seem to get the right answer for this current mock exam I just did. 10% Cost Capital,NPV includes Residual Value of 20000,NPV = 55 Cash Flows Year 1 130 Year 2 130 Year 3 130 Year 4 130 Year 5 150 I am getting 4.41 but answer is 4.47 I looked at your youtube video but does not include NPV + Residual Value??? So dont know how to treat these??? ACCA just seem to love to throw these things into the mix Thanks

John MoffatTutor3y ago#1

The residual value is discounted in the normal way depending on when it occurs.

SShane3y ago#2

Hi John still a bit confused as to how to get 4.47 years.This is my working Year 1 130 x .909 = 118.17 Year 2 130 x .826 = 107.38 Year 3 130 x .751 = 97.63 Year 4 130 x .683 = 88.79 411.97 Year 5 150 x 0.621 = 93.15 Inv 450 - 411.97 = 38.03/ Year 5 93.15 = .41 so I am getting 4.41?? Where is the other 0.06 coming from??

John MoffatTutor3y ago#3

It is because you have discounted each of the 130 per year individually rather than using the annuity factor (which would have been faster). As I explain in the lectures, that creates a rounding problem because the tables only go to three decimal places. That will not be a problem in the exam because the computer will either allow more than one answer or will ask for an answer rounded to (for example) the nearest thousand.