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Project Appraisal

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA MA – FIA FMA › Project Appraisal

  • This topic has 5 replies, 2 voices, and was last updated 11 years ago by John Moffat.
Viewing 6 posts - 1 through 6 (of 6 total)
  • Author
    Posts
  • June 19, 2014 at 7:14 am #177159
    Miss NM
    Member
    • Topics: 12
    • Replies: 23
    • ☆

    The following information relates to a two-year project:

    Initial investment – $1 million
    Cash inflow year 1 – $750,000
    Cash inflow year 2 – $500,000
    Cost of capital year 1 – 10%
    Cost of capital year 2 – 15%

    What is the net present value of the project?(to the nearest $500)

    A. ($12000)
    B. ($55000)
    C. $77000
    D. $116500

    June 19, 2014 at 8:07 am #177169
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54700
    • ☆☆☆☆☆

    Discount the year 1 cash flow by 1 year at 10%

    Discount the year 2 cash flow by 1 year at 15% and then by 1 year at 10%

    Then you will have it 🙂

    June 19, 2014 at 8:22 am #177174
    Miss NM
    Member
    • Topics: 12
    • Replies: 23
    • ☆

    Hi sir.. sorry but I still don’t get it. Could you please explain in details.
    Thank you

    June 19, 2014 at 8:28 am #177178
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54700
    • ☆☆☆☆☆

    I assume that you have watched my lecture on investment appraisal?

    If so, then you will know that in order to discount the year 1 flow of 750,000, you multiply by the one year discount factor at 10%.

    In order to discount the year 2 flow of 500,000, you would usually multiply by the 2 year discount factor at the cost of capital. However, because here the cost of capital changes, you discount for 1 year at 10% (i.e. multiply by the one year discount factor at 10%) and then by another year at 15% (so multiply the figure you now have by the 1 year discount factor at 15%).

    June 19, 2014 at 9:03 am #177186
    Miss NM
    Member
    • Topics: 12
    • Replies: 23
    • ☆

    Ok got it Sir Thnx a lot

    June 19, 2014 at 10:03 am #177194
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54700
    • ☆☆☆☆☆

    You are welcome 🙂

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