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Investment appraisal – Discounted cash flow techniques
3.4 Advantages and disadvantages of NPV
Considers the time value of money Difficult to explain to managers
Is an absolute ($) measure of return Requires knowledge of the cost of capital
Based on cash flows not profits Relatively complex
Considers whole life of project
Should lead to maximisation of
shareholder wealth
3.5 Use of present value tables
-n
The discount factor (1 + r) can be calculated or looked up in present value tables
given in the exam.
On the present value table, look along the top row for the interest rate and down the
columns for the number of years, where the two intersect you can read off the
discount factor.
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