KAPLAN Investment Planning 1 (SN3001 version)

Discussion in 'Financial Planning Study Group' started by darrenoc, 22nd Jan, 2011.

1. darrenocNew Member

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Hi everybody,
Just having some issues with question 2 on IP1 (version SN3001/2010). Also, I am happy to assist anyone else with some of the other questions.

email: [email protected]

This is my working out. Can someone advise if I am on the right track here:

(ii) Present Value
PV= C1 + C2 + C3+FV
1+i (1+i)2 (1+i)3

= 20,665 + 21,307 + 21,862+ 575,000
1 + 0.003 (1+0.003)2 (1+0.003) 3

= 20,603.19 + 21179.73 + 591,522.31

= \$ 633,305.23

Net Present Value

NPV = PV - Original Cost Price

= 633,305.23- 480,000

= \$ 153,305.23

2. ShelMember

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And this is the reason I am so scared to get stuck into this assignment!! Last one too...

I have answered all the 'easy' qns but keep putting off the calculations part. I just don't seem to have it in me

[email protected]

3. 888Member

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I've done all the 'easy' questions and am also up to these.

Darren, I was just wondering how you worked out the Interest Rate in your PV calculations - I'm just looking back on mine and I don't have the same rate - I'm going to re-do mine.

4. rachelleNew Member

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888, I have the same answer as Darren but I used a different rate as well. What rate did you use?

I'd used a rate of 0.075, but i'm not sure if this is right now...

5. 888Member

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I've re-done my calculations and have the same as Darren. When I originally did it I used the full rate of 7.5% but when I was re-doing the calcs I realised that you don't include the interest payments - ref 2:15. So I deducted the interest rate of 7.2% from 7.5% to get 0.3%. How did you work yours out?

6. rachelleNew Member

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The 0.075 is just the 7.5% converted to a decimal.

I see what you're saying about subtracting the 7.2% however I interpreted p. 2:15 to mean that the DCF of 7.5% already takes into account all interest costs for the investment loan and reduces the present value of the investment accordingly.

I thought that 'STOP' note was there to warn people not to calculate the interest costs of the loan and subtract them from the cashflow, as they have already been taken into account.

I thought that if we subtracted the 7.2% from the 7.5% than we are essentially removing the cost of the interest from the loan, so this is why I left in there.

Does that make sense?

I'm really confused now

7. 888Member

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When I first did the calcs. I used the 7.5% rate but then when I saw Darren's post I went back and re-read/re-did the calcs but I see what you mean about the STOP note on 2:15 - I think you're right what they're saying is not to calculate the interest because then it's being double counted. I think I will go back to what I originally had.
Did you say that you had the same answer as Darren? When I calculated using the 7.5% rate I got an \$513k figure is that correct? (can't remember bcos I saved the new calcs over this)

8. builder2818Well-Known Member

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I still think there is something wrong there - how can the present value of the property be substantially more then what she intends to sell it for?

I'm sort of swaying to the idea of using the \$130,000 deposit as the initial investment and using the sale proceeds of \$225,000 (sale price minus loan) in my calcs e.g:

PV=130,000+20665+21307+21862
`````````(1.075) (1.075)2 (1.075)3
=130000+19223+18438+17598+225000(sale proceeds)
= 410,259

NPV= Present Value - Original Investment
= 410,259 - 130,000
= 280,259

I am still a little unsure whether I should include the original investment in my PV calculation. If I don't, my PV calculates to be be what my NPV calc is. When I subtract the initial investment from that my NPV works out to be \$150,259

I don't think you should be subtracting the loans interest rate from the discount rate. It says in the box on page 2:15 the the 7.5% "discount rate that is applied takes account of the cost of borrowing by anticipating future interests costs and reducing the present value".

It also says "you must not include interest payments in your DCF cash flow table". Kaplan hasn't done this in the cash flow table they give us in the assignment question. It merely allows for cash expenses as deductions. If you see in the case study, the interests payments on the loan itself are greater then the net income she receives.

I was actually pretty confused about this whole question for a few days now but I think having spent the time explaining my idea through this post, I feel confident now that this is what I am going to run with - unless of course someone actually submits their assignment and finds out the answer.

Also, check out this article which gives a pretty good description of PV and NPV in relation to a property investment, which Kaplan have failed to do.

9. rachelleNew Member

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The answer I have is \$518,114 based on my calculations using the formula above with 7.5%

I hope it's right and I haven't just guided you in the wrong direction.

Good luck with it!

10. builder2818Well-Known Member

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I'm going to go with this part of my calcs and not using the initial investment in my PV calcs.

So my PV=19223+18438+17598+225000(sale proceeds)
=280,259

NPV = 280,259 - 130,000 (Initial Investment)
= 150259

11. rachelleNew Member

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I don't think you can simply subtract the loan (today) from the sale price (in two years time) because they are essentially two different time values of money

If you wanted to use the sale proceeds in the PV formula you would need to bring the sale price back to present value dollars.
Ie - Divide sale price by (1 + i)to the power of n and then subtract your loan.

12. 888Member

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Thanks for your help - I think you're on the right track - I've been reading through other posts on the forum and even though they're talking about the previous version the calcs they've been using an interest rate of .0875 so it makes sense to use the .075 rate Kaplan have provided
I'm glad chapter 2 isn't part of the exam!! The notes aren't that great.

13. builder2818Well-Known Member

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I came to that conclusion because if you read any accounting description online on how to calculate the NPV of an investment property they say you need to subtract the loan. Remember that the NPV is looking at cash flows, therefore a loan isn't a future cashflow.

I can't see how people are getting present values in the high numbers especially the OP who got over \$600,000. The box description on page 2:15 says "the discount rate that is applied takes account of the cost of borrowing by anticipating future interest costs and reducing the present value of the investment accordingly".

14. meeNew Member

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the above question is for 3 ii. The answer is

Present value (PV) = PMT + PMT + PMT

1+I (1+I)2 (1+I)3

= 20,665 + 21,306 + 596,861

1.075 1.1556 1.2423

= \$19,223.26 + \$18,437.17 + \$480,448.36

= \$518,108.79

Net Present Value (NPV) = \$518,108.79 - \$480,000

= \$38,108.79
The above question has been marked by the checker which deemed competent.

15. builder2818Well-Known Member

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What did you get for the IRR? When doing it in excel I get 28% if I don't include the sale of the property.

But if I do include the sale of the property I get 75%.

Are any of these correct?

16. samakaWell-Known Member

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For 3.b.ii - what discount rate did you guys use for calculating the fair price?