Investment Appraisal

System
System Posts: 100,534 🤖 Admin 🤖
edited 10:30AM in AAT student discussion
Hoping someone can help on this subject.<BR><BR>All of the questions I am revising from always state the company wish to invest in a new machine which is worth say £10,000 and has a nil residual value at the end of it's life. If say it had a value of 1,000 would you use £9,000 as the original investment figure to say calculate payback?<BR><BR>Also does anyone think that we will have to work out the discout factors. On all past exams these have been given and are also stated in the books as well but one book I have say students may need to work them out.<BR><BR>I have real trouble getting my head round all this. Just about to revise the IRR graph in case it crops up<BR><BR>Thanks and good luck to everyone, hoping the new examiner won't made it to different from the past papers<BR><BR>Me :-)

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  • System
    System Posts: 100,534 🤖 Admin 🤖
    Investment Appraisal

    we will be given discounted factors i am told
  • System
    System Posts: 100,534 🤖 Admin 🤖
    Investment Appraisal

    The value of investment does not change, but in the final year of investment at the end of the useful life you would expect to sell the machine for £1000, this would be a cash in flow and should be include as revenue in and included with any cash received in that year.<BR><BR>Shouldn't have to work out the DCF % but if you do its, for instance 10%<BR><BR>Year 0 1.00<BR>Year 1 0.909 (1/1.10)<BR>Year 2 0.826 (1/1.10/1.10)<BR><BR>The trick is to keeep diving by 1.10 for the years you want.<BR><BR>IRR, read up on the reasons for using IRR, note its not an investment appraisal method just a rate determinator to establish where the cut off point is for breakeven.
  • System
    System Posts: 100,534 🤖 Admin 🤖
    Investment Appraisal

    Thanks Petrol Monkey, you know so much I wish I was as confident.
  • System
    System Posts: 100,534 🤖 Admin 🤖
    Investment Appraisal

    Don't worry you can do it. Your just asking me the right questions. Good luck
  • System
    System Posts: 100,534 🤖 Admin 🤖
    Investment Appraisal

    Hate to disagree with Petrol Monkey, but IRR is a capital investment appraisal method.<BR><BR>The Osborne book says:<BR>"the principles of discounted cash flow can be developed further in order to calculate the capital investment appraisal method of internal rate of return"<BR><BR>Not trying to be picky, just would hate anyone to go into an exam with incorrect info<BR><BR>Lynn
  • System
    System Posts: 100,534 🤖 Admin 🤖
    Investment Appraisal

    In the book i have its ' not form of investment appraisal and is another way of employing DCF techniques'<BR><BR>When you mean capital investment i assume assessing the rate of capital borrowed?

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