margin of safety

System
System Posts: 100,534 🤖 Admin 🤖
edited June 18 in AAT student discussion
Could anyone tell my what the percentage margin of safety meant? I was just totally stumped when it came to that one.<BR>Also I got a positive NPV as well!<BR>

Comments

  • System
    System Posts: 100,534 🤖 Admin 🤖
    margin of safety

    missed out a bit, the 16.67 % was the level of sales that you should fall below before making a loss, same as the 23.08%
  • System
    System Posts: 100,534 🤖 Admin 🤖
    margin of safety

    Petrol Monkey<BR><BR>I did exactly the same as you. I thought the table for the NPV was horrible and had to draw my own table to check the answer was wright with the other table! The NPV was definately negative. Can anyone tell me what they put when having to say on the last question what other investment appraisal could have been used?
  • System
    System Posts: 100,534 🤖 Admin 🤖
    margin of safety

    i forgot to include the 000,but i done it right,would i get mark for this answer
  • System
    System Posts: 100,534 🤖 Admin 🤖
    margin of safety

    i rounded up because when i double checked the answers it didnt come back to the original figure...looks like i now should have gone with the 2 decimal places.....<BR><BR>I also got a negative NPV.... also on the report I waffled on about income after year 3 and whether the project had any scrap value....<BR>
  • System
    System Posts: 100,534 🤖 Admin 🤖
    margin of safety

    In the question i think it mentioned giving the answer to 2 decimal places.
  • System
    System Posts: 100,534 🤖 Admin 🤖
    margin of safety

    i rounded up, was this wrong? please tell me <img src="i/expressions/face-icon-small-sad.gif" border="0">
  • System
    System Posts: 100,534 🤖 Admin 🤖
    margin of safety

    16.67 and 23.08
  • System
    System Posts: 100,534 🤖 Admin 🤖
    margin of safety

    my percentages were 17 and 23 is this wrong <img src="i/expressions/face-icon-small-sad.gif" border="0">
  • System
    System Posts: 100,534 🤖 Admin 🤖
    margin of safety

    Im a bit worried about the NPV as i got £69,000 negative. Nothing like anybody else.
  • System
    System Posts: 100,534 🤖 Admin 🤖
    margin of safety

    Hi<BR><BR>I got a negative NPV as the cashflows were around the £500 mark - so Im with you!
  • System
    System Posts: 100,534 🤖 Admin 🤖
    margin of safety

    The inflows were in £000 as were all figures.<BR>ie the original investment was £1,500,000<BR><BR>
  • System
    System Posts: 100,534 🤖 Admin 🤖
    margin of safety

    That would be it, I thought I missed something out.<BR><BR>Thanks
  • System
    System Posts: 100,534 🤖 Admin 🤖
    margin of safety

    If the NPV was based on net cash flows then the NPV would have been positive by £250,000 but i think because we used discounted cash flows the NPV became negative.
  • System
    System Posts: 100,534 🤖 Admin 🤖
    margin of safety

    sorry I am confused about the NPV as I had nothing like 116000. <BR>The inflows were only around the 500 mark each? Or i am thinking about a totally different question
  • System
    System Posts: 100,534 🤖 Admin 🤖
    margin of safety

    Margin of safety to my knowledge is the percentage by which we "fall behind" on production before we make a loss.<BR><BR>On the Pos NPV you probably should have gotten Negative. This is because if you take the capital rev (1500) and ADD the year end cashflows you would have gotten -116. Hopefully they will mark you on the correct figure.<BR><BR>
  • System
    System Posts: 100,534 🤖 Admin 🤖
    margin of safety

    margin of safety is the level of output activity budgeted should fall below before making a loss. I got -116,830 for NPV
  • System
    System Posts: 100,534 🤖 Admin 🤖
    margin of safety

    <BR><BR>Some of you guys r mixing up.<BR><BR>The margin of safety and NPV were two separate Questions.<BR><BR>The margin of safety for me became 20% and 30% because I devided the difference between the budgeted sales and breakeven by the value of break even, and I am not quite sure that this is correct.<BR><BR>One of them was (480000-400000)/400000 = 20%<BR>The other was (910000-700000)/700000 = 30%<BR><BR><BR>I got the NPV as most of you got (-116.83) times 000, which was negative 116830. This caused me to recommend not to undertake this project even though our payback period was less than 3 years (2.6 years to be more specific).<BR><BR>Another method to assess invetment was by using the internal rate of return (IRR), and the financial relevant issues might be, as shellibelli mentioned, the income after 3 years and if there was any residual value.<BR><BR>Good luck everyone.<BR><BR>
  • System
    System Posts: 100,534 🤖 Admin 🤖
    margin of safety

    For margin of safety I used budgeted sales - breakeven/budgeted sales x 100%<BR><BR>B = 480,000-400,000/480,000x 100% =16.67%<BR>C= 910,000-700,000/910,000x 100 = 23.08%
  • System
    System Posts: 100,534 🤖 Admin 🤖
    margin of safety

    <BR><BR>For margin of safety I used budgeted sales - breakeven / breakeven sales x 100<BR>B = 480,000-400,000/400,000x 100% =20%<BR>C= 910,000-700,000/700,000x 100% = 30% <BR><BR>As i assumed they wanted the %age of safety that was budgeted for over the breakeven point<BR>But i know i got the formula round the wrong way now! I should have divided by the budgeted sales. :-(<BR><BR>
  • System
    System Posts: 100,534 🤖 Admin 🤖
    margin of safety

    B = 480,000-400,000/80,000x 100% =17%<BR>C= 910,000-700,000/210,000x 100% = 23%<BR><BR>thats why mine came out as a whole number!! will i be penalised for this?
  • System
    System Posts: 100,534 🤖 Admin 🤖
    margin of safety

    I seem to have got the same answers as petrol monkey for payback and NPV but I am sure I missed part of the question as I did my own table to find out payback. I am sure there was a table at the top of the paper which I did not fill in . Can anyone remember?
  • System
    System Posts: 100,534 🤖 Admin 🤖
    margin of safety

    for the percentage margin of safety i too got 20% and 30%.<BR><BR>I did at first get the answers most of you got i.e 16.67% etc etc but when I worked back the answer to check it didnt add up.<BR><BR>So i stuck to 20% and 30%, which did.

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