Hello Tutor, I have two question about this topic,there are
Q1) Investment E offers interest of 4 % per year compounded semi-annually for a period of three years.Investment W offers one interest payment of 20% at the end of its four-year life.
What is the annual effective interest rate offered by two investment?
ANSWER: 4.04 % for Investment E, 4.66 % for investment W.
(How to calculate the annual effective interest rate for this question?)
Q2) An investment of $120,000 on 1 April 2016 is forecast to yield a net cash flow of $14,000 each year for four years commencing on 31 March 2017, followed by $20,000 each year in perpetuity .The appropriate cost of capital is 8% per year.
What is the positive net present value of the investment (to the nearest $1,000)?
(Why the cash flow of $14,000 is T2 not T1?calculate starting from year 2 not year 1?)
Ask the Tutor ACCA MA
investment appraisal / capital budgeting
9y ago#1Q1:
Have you watched my free lectures on this?
The lectures are a complete free course for Paper F2 and cover everything needed to be able to pass the exam well!
Investment E:
The interest every six months is 4/2 = 2%
Therefore 1+r = 1.02^2 (because there are 2 six month periods in a year)
Therefore r = 4.04%
Investment W:
If the annual interest rate if r, then (1+r)^4 = 1.2 ( to the power 4 because there are 4 years)
So 1+ r = fourth root of 1.2 = 1.0466
r = 4.66%
Yes :) , I had watched the lecture video and notes on this
I had understood the first question because there are four years and if you needs to find annual interest rate then it is the fourth root of r
but for the second question, if the investment start from 1 April 2016 to 31 March 2017 is one year T0 , why the first receipt $14000 from 31 March 2017 is T2 not T1?
Thank you for your reply.
9y ago#3The first receipt is not at time 2 - it is at time 1 (because 31 March 2017 is one year after 1 April 2016).
So there is interest for that first year and in total for four years.
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