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Investment Planning 1 AS3001 Question 3 IRR

Discussion in 'Financial Planning Study Group' started by niccers77, 29th Mar, 2011.

  1. niccers77

    niccers77 Member

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    I am struggling with the concept of IRR.

    I have a PV = $518,110.46
    NPV = $518,110.46-$480,000.00
    = $38,110.46 with a rate of 7.5%

    If anyone is able to give me some hints I would appreciate it.

    Thanks
     
  2. builder2818

    builder2818 Well-Known Member

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    The PV you have is right. I used that number and subtracted $130,000 to give me the NPV but I was marked wrong and told not to use the loan in my calculation.

    This obviously gave me a wrong answer for my IRR but you can do it easily in excel, then just use the formula they give in the text to estimate the IRR yourself.

    I still passed the assignment but I think it is pretty slack on Kaplan's end for not demonstrating what they mean when it comes to calculating these figures in RELATION TO PROPERTY.
     
  3. Jess126

    Jess126 Member

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    Hi there
    I am currently completing this question but got a different answer for the present value. The answer I calculated was $535,285.

    Could you please let me know exactly how you calculated your answer of $518,110.46. Did you use the net cash flow figures as the payment amount, 7.5% as the discount rate, discounted for 3 years and then did you add $480,000 to the answer.

    Any help on this is greatly appreciated.
    Thanks
     
  4. niccers77

    niccers77 Member

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    The formula I used is;

    PV=PMT+ PMT/(1+I)+ PMT/((1+〖I)〗^2 )+PMT/((1+〖I)〗^3 )

    i used the Net income amounts, 7.5% for 3 years, however I did not add the $480,000 to it. I am still working on this answer as I am not sure I am happy with it...I will keep you posted.

    Is this the same formula you have been using?
     
  5. Jess126

    Jess126 Member

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    Hello

    Yes I used the same formula. I used the 480,000 as the first payment amount in the formula before discounting. Do you mind if I ask what amount you used as the first payment amount.

    I presumed that we would be required to use the 480,000 as this was the inital outlay of money used to purchase the property
     
  6. BabyAngel

    BabyAngel New Member

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    Qld
    Hey any response on how you set this out cause my IRR on the caculator doesnt match my manual workings not sure what im doing wrong>??>
     
  7. 1975faz

    1975faz New Member

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    Perth, WA
    Its a slight rounding issue with years 2 and 3 when I used my HP calculator, I also got 10.38%, 10.4% IRR with my HP calculator.PV is only discounted at 7.5% cash flows with year 3 also includes disposal. NPV is the sum of all PV net cash flows minus the initial cost price (sick of seeing others who are confused over it!). IRR is the theoretical discount rate back to zero. Its the highest rate that the project can support as an investment. Another thing with Kaplan mathmatically the discount factor is normally calculated as less than 1.

    This course is poorly written, I went back to my old uni finance books and also have been using ASX product website. It is also out of date, eg options (1 per 100 not 1 per 1,000 anymore) and they write long winded sentences (some of the comma use is crazy could had kept it short and sweet with full stops) that contradict themselves. My favourite is the term "unlimited losses" for options, it depends in what price it is written at by the seller and how much capital they can afford to lose. Prosectus is another area which is badly written with their understanding of "lodged and registered" when ASIC reviews a prospectus. Mine is due today, but need this week to finish it off with the grace period of 1 week that they allow. I haven't done q5 yet, finishing off 4b (no idea how much they want with 4b, any ideas?). The reason why I'm doing the diploma level is I left uni over 10 years ago and its not recognised with Kaplan or ASIC with 5 year time period with study degrees (also have no ther professional qualifiactions for exemptions at Grad Dip level). Out of interest, how much did others have in typed pages, I'm upto 5,000 words or something crazy (cutting it down, where I can). This reminds me of FP assignment with the SOA etc in what I handed in last year!

    If anyone wants to check anything let us know over this week. Happy to return the favour with others in the past!
     
  8. builder2818

    builder2818 Well-Known Member

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    The text would have been written way before the ASX announced the reduction of contract sizes down to zero.

    The losses are never unlimited to the seller of a PUT option - the stock can only go to zero...the maximum loss to the option seller is the strike price they sold the option at. The seller of the CALL option is theoretically exposed to "unlimited" losses but only a complete idiot would allow an ITM Call option run.

    This is assuming these option sellers are writing naked options.
     
  9. kwakker

    kwakker Active Member

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    niccers77 I got the same figures as you using the same formula.

    Jess126 if you look at section 2.4.1 it goes through an example that is similar to this, however with our example we don't have any immediate lump sum payments, and the first payment occurs at year 1.