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DR IAN MACKECHNIE
10:16:46 PM
An important thing to understand is that the cash flows for years 1 to 5 amount to $65,000

DR IAN MACKECHNIE
10:17:38 PM
However, when they are discounted or brought back to todays values, using the % of 12%, there REAL value is $47,675

DR IAN MACKECHNIE
10:17:53 PM
Understand?

DR IAN MACKECHNIE
10:18:16 PM
Now the 12% is the RISK factor

KOI PIT WOON
10:18:17 PM
yes...understood

DR IAN MACKECHNIE
10:19:15 PM
Now, because the cash flows,AFTER discounting, or taking into consideration the RISK factor, is GREATER than the intial outlay of $40,000, then the project should be accepted and proceed

DR IAN MACKECHNIE
10:19:40 PM
Understand?

KOI PIT WOON
10:19:56 PM
yes...

DR IAN MACKECHNIE
10:19:59 PM
Yuen????

DR IAN MACKECHNIE
10:20:20 PM
Good, Mr Koi

YUEN BOK MUN
10:20:30 PM
i am confuse, how to get the 7675

YUEN BOK MUN
10:20:55 PM
still calculating

DR IAN MACKECHNIE
10:21:32 PM
OK..into the calculation, we put the initial outlay of $40,000. +/-

DR IAN MACKECHNIE
10:22:06 PM
Then we discounted the cash flows of $65,000 which gave us $47,675

DR IAN MACKECHNIE
10:22:10 PM


DR IAN MACKECHNIE
10:22:10 PM


DR IAN MACKECHNIE
10:23:00 PM
DEDUCT the DISCOUNTED cash flows FROM the initial outlay (47,675 - $40,000) and you get $7,675

DR IAN MACKECHNIE
10:23:30 PM
Understand??

KOI PIT WOON
10:23:49 PM
Dr. Is Net Present Value also refer to NetP rofit??...

DR IAN MACKECHNIE
10:24:16 PM
No, because we are talking about CASH flows only here

KOI PIT WOON
10:24:34 PM
ok...understood

DR IAN MACKECHNIE
10:25:16 PM
IF there were no non cash items, the accountants would probably say that the net profit from this project would be $65,000 less $40,000 = $25,000

DR IAN MACKECHNIE
10:25:40 PM
But that would not include deprecian on the machine ...

DR IAN MACKECHNIE
10:26:08 PM
Got that?

YUEN BOK MUN
10:26:34 PM
but , how to get the 7675?

KOI PIT WOON
10:26:41 PM
yes....

DR IAN MACKECHNIE
10:26:44 PM
If you have, then you should be able to tackle several of the assignment questions with confidence

DR IAN MACKECHNIE
10:27:08 PM
Did you see my explanation above, Yuen?

DR IAN MACKECHNIE
10:27:16 PM
Once again...

DR IAN MACKECHNIE
10:27:35 PM
The cash flows for years 1 to 5 amount to $65,000

DR IAN MACKECHNIE
10:27:38 PM


YUEN BOK MUN
10:27:46 PM
yes,

DR IAN MACKECHNIE
10:29:04 PM
However, we have to discount that amount each year by 12% to bring back to a discounted figure of $47,675. Deduct $47,675 from the initial outlay of$40,000 + $7,675

DR IAN MACKECHNIE
10:29:17 PM
= $7,675

DR IAN MACKECHNIE
10:29:46 PM
Understand?

YUEN BOK MUN
10:29:54 PM
yes

YUEN BOK MUN
10:30:05 PM
now i get the point

DR IAN MACKECHNIE
10:30:16 PM
Remember you calculate this with a financial calculator as each years cash flow has to be disco unted

DR IAN MACKECHNIE
10:30:29 PM
OK. Good

DR IAN MACKECHNIE
10:30:32 PM

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