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Good Afternoon
Dear Sir,
Please provide me the answers of the following:What is the main difference b/w ARR And IRR?
What is the meaning of IRR is the rate of return at which NPV = 0 ?
In Capital Rationing when ranking the projects from highest P1 to lowest P1 why do we rank the project as first (higest) when it has ZERO NPV ?
this question was tested in JUNE 2014 Q:1 part (b)Regards
Samran Saqib
ACCA StudentAs far as the first two questions are concerned, you must watch the free Paper F9 lectures – I cannot type out the whole lecture here!!!!
ARR is an accounting measure (accounting profits and SOFP values); IRR is dealing only with cash flows and is the rate of interest at which the NPV is zero.
The main use of the IRR is the fact that in practice it is impossible to be certain of the cost of capital. However, if we feel that the cost of capital is likely to be less than the IRR then the project will be acceptable, if not then it won’t be. It gives us an idea of the sensitivity.
In respect of your third question, the examiner states the reason in his answer!! Project E (with zero NPV) has to be undertaken – it says so in the question (immediately below the heading “Project E”). Were it not for this then it certainly would not be ranked first.
i have 1more question in Past ppr june 2013 q:1 regarding working capital cash flows it says in the q:
Initial invstmnt in Wc is $500,000.
Investmnt in Wc will be subject to general rate of inflation which is expected to be 4.7% per year.Wc requirement ($000)
In T0 ($500)
T1 $ (523.5)
T2 $ (548.1)
T3 $ (574)Wc c.flows ($000)
In T0 ($500)
T1 $ (24)
T2 $ (25)
T3 $ (26)
T4 $ (27) why? ?
In T4 it Wc is recoverd fully usually why its not 574 positive in T4 ? ?In future, please start a new thread when you are asking about a different question. We cannot give private tuition free of charge and so our answers to question are trying to help everybody.
This answer was very unusual. Usually we assume that all of the working capital is recovered at the end of the project. The reason it did not happen here is that the question says that the machine will be replaced. Therefore presumably we will still continue to produce the product, and therefore presumably the working capital will still be needed.
It was unfair of the examiner, and he realised that. He said that if the working capital had been recovered, then it would still get full marks (even though, obviously, the final answer would be different.)
Appreciated Sir I got that it would not happen next time 😮
now regarding the above question it means we donot have to worry about what examiner did and we just have recover the working caplital after the end of the project?
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