# Stuck on Costs and Revenues Test Two Q14 of 15 Osborne question bank

Registered Posts: 452
Hi all,

hope your all enjoying the bank holiday.

If anyone could help me with the below i would be grateful.

The correct answer is 2 years and 11 months but i make it 2 years and 10 and can not figure out why.

My calculations are

90,000
(30,000)
(50,000-20,000)
£60,000 - outstanding at end of "year1"

"year2":

£72,000 - (120,000-48,000)
72000 / 12 = £6000 per month
£60,000 / 12 = 10 months

therefore the machine would be paid for in 2 years 10 months where is the extra month coming from mega :confused1:

• Registered Posts: 138 Dedicated contributor 🦉
I may have caught to much sun, but isn't that 1 year 10 months, as your haven't fully completed year 2?
• Registered Posts: 218 Beyond epic contributor 🧙‍♂️
We were told to work it out differently but I am getting the 1 year, 10 months

I have it as

-90 30 72 60

-90 +30 = -60, 60/72 x 12 = 9.99

so would round it up to 10 months.
• Registered Posts: 2,525 Beyond epic contributor 🧙‍♂️
Cudey wrote: »
I may have caught to much sun, but isn't that 1 year 10 months, as your haven't fully completed year 2?

I agree it is 1 year and 10 months.
~ An investment in knowledge always pays the best interest ~
Benjamin Franklin
• Registered Posts: 452
thank you all for your confirmation.

I am getting bit fed up with amount of mistakes in answers especially Kaplan it is riddled with them on this particular unit, i waste ages doubting myself and then confusing myself !
• Registered Posts: 452
does year 0 count as a year ?as i have just done a aat practice paper where it did not count i.e year 1 = year 1 of the payback instead of year 0 = year 1 when you purchase the asset ,then year 1= year 2 etc

hope that makes sense not great at explaining things and slightly confused again now

2 year 3 months correct answer but i had it as 3 years (counting year 0)

• Registered Posts: 2,525 Beyond epic contributor 🧙‍♂️
Hi Topcat

No - Year 0 is not included in the example above as there was no payback until Year 1. The only transaction in Year 0 is the Cap Ex.

Are you happy with how the payback period of 2 years 4 months was calculated in this question?

JC
~ An investment in knowledge always pays the best interest ~
Benjamin Franklin
• Registered Posts: 41 Epic contributor 🐘
1 YEAR 10 MONTHS

For payback period you don't count years as points in time: Y0,Y1,Y2,... but you count years as periods as from Y0 to Y1 = one year, from Y1 to Y2 = second year, and so on...
• Registered Posts: 452
Jo Clark wrote: »
Hi Topcat

No - Year 0 is not included in the example above as there was no payback until Year 1. The only transaction in Year 0 is the Cap Ex.

Are you happy with how the payback period of 2 years 4 months was calculated in this question?

JC

Hi Jo :-)

Yea I am okay with how to work out the month part that pesky year 0 was just causing me problems.

Thank you for your help has finally clicked (i confuse my self with the easiest of things)
• Registered Posts: 452
In these types of questions I keep seeing statements along the following lines but can not get my head around what it means, does any one know?

"the company appraises capital investment using a 15 percent cost of capital "
• Registered Posts: 782
The cost of capital is used to calculate the PV factor. I don't know if you've seen the PV/future value tables but they are big grids with the columns titled 1%, 2% etc and the rows labelled year 1, year 2 etc. You find your cost of capital across he top, the year you are concerned with down the side, and the figure where the 2 meet is your PV value. I think you are always given the values in AAT though, but that's where they come from (google Present value tables and you'll find copies of them online).
• Registered Posts: 452
Nps1976 wrote: »
The cost of capital is used to calculate the PV factor. I don't know if you've seen the PV/future value tables but they are big grids with the columns titled 1%, 2% etc and the rows labelled year 1, year 2 etc. You find your cost of capital across he top, the year you are concerned with down the side, and the figure where the 2 meet is your PV value. I think you are always given the values in AAT though, but that's where they come from (google Present value tables and you'll find copies of them online).

Hi Nps,

Thank you , Coin has dropped i had previously looked at these but forgot how they worked but now can see where the pv factor comes from :thumbup1: