Net Present Value ECR help!!

System
System Posts: 100,534 🤖 Admin 🤖
edited June 18 in AAT student discussion
I'm struggling with revising for the ECR Skills test that i still need to take! The trouble is how do you work out the NPV when you don't have a table to use?
In 'Belt and Braces' a past skills test paper, one of the questions asks you to calculate the NPV when the interest rate is 15%, this would be easy to do if it gave you the table with the interest already calculated per year/per income, but it doesn't!

if anyone out there knows what i'm talking about please let me know the calculation for this? Unfortunatley BPP don't believe this is something that is comes up on exams but its a skills test that is in a BPP assesment kit!!
I'm sure its really easy but i just can't get my head around it, help someone please....?x :oops:

Comments

  • System
    System Posts: 100,534 🤖 Admin 🤖
    Re:Net Present Value ECR help!!

    PV is the reverse of compound interest.

    To calculate compound interest its

    Future Value = Present Value * ((1+r) to the power n)

    where r is the interest rate expressed as a decimal (or sometimes referred to as cost of capital if its based on investment) and n is the number of years.

    To work out the PV you are working backwards to find a current value from a future value, so using the theory behind linear equations this becomes:

    Present Value = Future Value divided by ((1+r) to the power n)

    The NPV being this minus the capital outlay.

    Hope this helps, let me know if something dosent make sense or I havent explained it to well. It difficult writing algebra on this thing.

    Remember this will will only work out one cashflow. If you working on cashflows over several years you need to either:

    1) work each out seperately

    or if the cashflows for each year are the same:

    2) use a cumulative PV table
    3) use even more complex algebra which I can provide if necessary!
  • System
    System Posts: 100,534 🤖 Admin 🤖
    Re:Net Present Value ECR help!!

    Whilst this is technically perfectly correct, in 25 years teaching AAT I have never seen a simulation or exam written by the AAT which didn't provide the factor to use. After all, the AAT is a competence based qualification and in the work place you would look the factors up in a table not sit down and do advanced algebra

    Graham Blott
  • System
    System Posts: 100,534 🤖 Admin 🤖
    Re:Net Present Value ECR help!!

    Aye sorry I didn't consider that, and don't know the AAT syllabus anymore.
  • System
    System Posts: 100,534 🤖 Admin 🤖
    Re:Net Present Value ECR help!!

    it is useful to know how to calculate it but as they said above it is provided in the exam/simulation

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