Advance Investment Appraisal
RELEVANT TO ACCA QUALIFICATION PAPER F9
Studying Paper F9? Performance objectives 15 and 16 are relevant to this exam
ADVANCED INVESTMENT APPRAISAL
Investment appraisal is one of the eight core topics within Paper F9, Financial Management and it is a topic which has been well represented in the F9 exam. The methods of investment appraisal are payback, accounting rate of return and the discounted cash flow methods of net present value (NPV) and internal rate of return (IRR). For each of these methods students must ensure that they can define it, make the necessary calculations and discuss both the advantages and disadvantages. The most important of these methods, both in the real world and in the exam, is NPV. A key issue in the Paper F9 syllabus is that students start their studies with no knowledge of discounting but are very rapidly having to deal with relatively advanced NPV calculations which may include problems such as inflation, taxation, working capital and relevant/irrelevant cash flows. These advanced NPV or indeed IRR calculations have formed the basis for very many past exam questions. The aim of this article is to briefly discuss these potential problem areas and then work a comprehensive example which builds them all in. Technically the example is probably harder than any exam question is likely to be. However, it demonstrates as many of the issues that students might face as is possible. Exam questions, on the other hand, will be in a scenario format and hence finding the information required may be more difficult than in the example shown. The problem areas Inflation Students must be aware of the two different methods of dealing with inflation and when they should be used. The money method is where inflation is included in both the cash flow forecast and the discount rate used while the real method is where inflation is ignored in both the cash flow forecast and the discount rate. The money method should be used as soon as a question has cash
Studying Paper F9? Performance objectives 15 and 16 are relevant to this exam
ADVANCED INVESTMENT APPRAISAL
Investment appraisal is one of the eight core topics within Paper F9, Financial Management and it is a topic which has been well represented in the F9 exam. The methods of investment appraisal are payback, accounting rate of return and the discounted cash flow methods of net present value (NPV) and internal rate of return (IRR). For each of these methods students must ensure that they can define it, make the necessary calculations and discuss both the advantages and disadvantages. The most important of these methods, both in the real world and in the exam, is NPV. A key issue in the Paper F9 syllabus is that students start their studies with no knowledge of discounting but are very rapidly having to deal with relatively advanced NPV calculations which may include problems such as inflation, taxation, working capital and relevant/irrelevant cash flows. These advanced NPV or indeed IRR calculations have formed the basis for very many past exam questions. The aim of this article is to briefly discuss these potential problem areas and then work a comprehensive example which builds them all in. Technically the example is probably harder than any exam question is likely to be. However, it demonstrates as many of the issues that students might face as is possible. Exam questions, on the other hand, will be in a scenario format and hence finding the information required may be more difficult than in the example shown. The problem areas Inflation Students must be aware of the two different methods of dealing with inflation and when they should be used. The money method is where inflation is included in both the cash flow forecast and the discount rate used while the real method is where inflation is ignored in both the cash flow forecast and the discount rate. The money method should be used as soon as a question has cash