EXAM TIPS
Calculate holding cost of buffer inventory separately!
If Finance Cost is excluded from holding cost, need to factor it back in when doing EOQ etc
When concluding the relevant costs, ensure you explain why you are excluding costs
When doing ROCE/ARR calculations, if only cashflows are given, deduct depreciation to get
the profit. Divide the profit figure to get the annual profits
When calculating payback time, always round up to the nearest month
NPV is positive so the project should be accepted in order to increase shareholder wealth
When finding the PV of Annuity, you can find the PV for each year and then sum it all up, or
use the DF in the annuity table
Foreseeable Future – perpetuity
Advanced/Delayed Annuity
Cashflows
T0 T1 T2 T3 T4 T5
Normal x x x
Advanced x x x
Delayed x x x
o If advanced, multiply by Annuity (DF + 1)
o If delayed, multiply by PV DF then multiply Annuity DF(n-1)
Advanced Perpetuity
o If advanced, multiply by 1/R + Original Amount
o If delayed, multiply by 1/R x PV DF
o If delayed growing, multiply by 1/R-G x PV DF
In excel =IRR(Range of cashflows)
NPV over IRR when there is a conflict as it is an absolute measure
Use formulas to work out NPV calculations relating to inflation
When all costs have been inflated in NPV, use money rate to get discounted PV
Incremental working capital should always total zero
Cashflow for advanced lease payment
T0 T1 T2 T3 T4
Lease
Payment (X) (X) (X) - -
Tax Saving - - X X X
AF is all the prior PV discount factors added together
Sensitivity Analysis
o Selling price – PV of sales
o Variable costs – PV of variable costs
o Sales Volume – PV of contribution
o Discount rate/Cost of Capital – find IRR
Calculate holding cost of buffer inventory separately!
If Finance Cost is excluded from holding cost, need to factor it back in when doing EOQ etc
When concluding the relevant costs, ensure you explain why you are excluding costs
When doing ROCE/ARR calculations, if only cashflows are given, deduct depreciation to get
the profit. Divide the profit figure to get the annual profits
When calculating payback time, always round up to the nearest month
NPV is positive so the project should be accepted in order to increase shareholder wealth
When finding the PV of Annuity, you can find the PV for each year and then sum it all up, or
use the DF in the annuity table
Foreseeable Future – perpetuity
Advanced/Delayed Annuity
Cashflows
T0 T1 T2 T3 T4 T5
Normal x x x
Advanced x x x
Delayed x x x
o If advanced, multiply by Annuity (DF + 1)
o If delayed, multiply by PV DF then multiply Annuity DF(n-1)
Advanced Perpetuity
o If advanced, multiply by 1/R + Original Amount
o If delayed, multiply by 1/R x PV DF
o If delayed growing, multiply by 1/R-G x PV DF
In excel =IRR(Range of cashflows)
NPV over IRR when there is a conflict as it is an absolute measure
Use formulas to work out NPV calculations relating to inflation
When all costs have been inflated in NPV, use money rate to get discounted PV
Incremental working capital should always total zero
Cashflow for advanced lease payment
T0 T1 T2 T3 T4
Lease
Payment (X) (X) (X) - -
Tax Saving - - X X X
AF is all the prior PV discount factors added together
Sensitivity Analysis
o Selling price – PV of sales
o Variable costs – PV of variable costs
o Sales Volume – PV of contribution
o Discount rate/Cost of Capital – find IRR
