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Hello Sir,
I have tried to solve a few questions on investment appraisal, and though I understand the concept of what needs doing, I get my years wrong. So which year to apply what cost I am getting it wrong. In this example the question reads that the production will begin in a years time when the approaval is granted. so Today being time zero in one year’s time will mean year one. However in the answer they have calculated it from year 2. I had same issue the previous question “Furnhurst” where they said the marketing cost will happen at the end of year 1, so I put that down to year 2, but the model answer included it in year 1. Cold you please help me understand this? also will I get the no marks if I got my years wrong in the exam?
Thank you
TejalDespite the fact that the examiner heads up the columns year 1, year 2 etc., they are not years. Time 0 is now. Time 1 is one year from now. Time 2 is 2 years from now, and so on.
Also, the always assume that revenue and cost flows occur at the ends of years (unless the question specifically says differently e.g if it says the cost is incurred at the start of the year).
So if production starts in 1 years time, then the first cost will be in the second year. We assume that the cash flow is at the end of the year and so the first cash flow will be 2 years from now i.e. at time 2.
if you get your years wrong, then although you will not lose all of the marks you will certainly lose many marks.
(Usually of course production starts immediately, and if that had been the case here then the first costs would be in the first year and the cash flow would be at the end of the first year which is 1 year from now and therefore time 1.)
This ‘rule’ becomes even more important when dealing with tax in questions. If you are still at all unsure then it would be worth watching our free the lectures on investment appraisal for Paper FM.
I hope that helps 🙂Thank you sir for your response. Yeah I think I will have to watch those videos again looks like. Thank you again
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