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investment appraisal

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA MA – FIA FMA › investment appraisal

  • This topic has 3 replies, 2 voices, and was last updated 7 years ago by John Moffat.
Viewing 4 posts - 1 through 4 (of 4 total)
  • Author
    Posts
  • October 22, 2015 at 5:08 pm #278446
    mujahidaslam
    Member
    • Topics: 16
    • Replies: 3
    • ☆

    What is the Internal Rate of Return of the machine (to the nearest %)?
    A 16%
    B 17%
    C 18%
    D 19%

    A company is considering investing in a new machine that will cost $270,000 and will last for 4 years with a
    scrap value at the end of 4 years of $20,000.
    It is expected to generate operating cash inflows each year as follows:
    Year 1: $50,000
    Year 2: $180,000
    Year 3: $100,000
    Year 4 $50,000
    The cost of capital is 12% per annum.

    sir how have u calculated the irr in this i cannot understand why have you taken it on 20 percent and then in irr you have assumed it as 8 percent please explain i have done the rest

    October 22, 2015 at 5:22 pm #278449
    John Moffat
    Keymaster
    • Topics: 56
    • Replies: 51599
    • ☆☆☆☆☆

    In calculating the IRR you can make any two guesses and then approximate between them.

    12% is an obvious first guess (since the cost of capital is 12%).

    The reason I chose 20% as the second guess is simply because the choices of answers in the question go up to 19%. You could equally have choose 19% as your second guess.

    I have not assumed anything at all. Any two guesses will do – the answer is only every approximate, which is they the questions asked to the nearest %.

    If you have not already done so, then I do suggest that you watch the free lectures on this. Our lectures are a complete course for Paper F2 and cover everything you need to be able to pass the exam well.

    October 22, 2015 at 5:31 pm #278454
    mujahidaslam
    Member
    • Topics: 16
    • Replies: 3
    • ☆

    thank you sir i have studied f2 from my personal tutor but the classes are over now and i was doing your notes individually so from wherever i get stuck i ask you 🙂

    October 23, 2015 at 7:18 am #278495
    John Moffat
    Keymaster
    • Topics: 56
    • Replies: 51599
    • ☆☆☆☆☆

    You are welcome 🙂

  • Author
    Posts
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