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Hello Sir.
There is a question which reads as follows :
X Ltd needs to replace a major item of capital equipment in 5 years time. The estimated replacement cost will be £750,000. Funds for the replacement will be provided by setting aside 5 equal sums and investing them at 10%. The first amount will be invested immediately, the last in 4 years time.
What is the annual amount to set aside?
The answer is £111,691 but i cant understand why. Should we take year 0 to year 4 or start with year 1 to year 5? What about the discount factor?
Thank You.
This is not relevant for the AFM paper – it is the basic MA exam!!
The present value of the cost in 5 years time of 750,000 must be equal to the present value of the sums set aside each year.
So calculate the PV of the 750,000 at 10%.
Then divide the PV by the discount factor for the 5 equal payments to get the amount of each equal payments. Because the payments start immediately, the are from time 0 to time 4 and the discount factor is therefore 1 + 4 year annuity factor at 10%.
I told you yesterday that we do not provide support for the ICAEW exams. I also told you that you are welcome to watch our free ACCA lectures and ask questions directly related to the lectures.
Asking questions like this, which could not be asked in the AFM exam, simply confuses our ACCA students and sorry, but similar questions in future will be deleted.I gave you the link yesterday to tuition providers for the ICAEW exams.
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