00:01
Okay, we are going to be looking at project appraisal.
00:06
We are given a scenario of a project that has an initial capital outlay as well as the years, subsequent years in which there's been a cash inflow.
00:23
So the question requires of us to be able to determine whether the project should be acceptable using the project.
00:31
The payback method.
00:32
So as a start, a few underlying issues that we need to quickly resolve.
00:40
The first one is the fact that the, apparently the figures that have been given may not be really helpful in helping us explain the concept of the discounted payback method.
00:58
So, but before we get the problem, i just need to to indicate the firstly that we're going to be dealing with the discounted or the discount factor.
01:14
Okay, we'll talk a little bit about that and the discounted value.
01:20
So we can simply write here the present value.
01:26
Then we obviously going to be look at the years in which the catch flows.
01:33
Have been recorded.
01:42
So we begin with year zero, which basically should outline the initial capital outlay, which i'm going to indicate with the bracket here.
01:55
Now, it's 1 ,000 is what is reflecting in the question, but obviously there seems to be a type or they cannot be.
02:03
So i've determined that we use a practical.
02:09
Workable amount of 15 ,000 just to be able to explain the concept.
02:14
And we have year one, year two, year three, in which there's been cash flow as well as year four.
02:23
All right.
02:24
So let me see if i'm able to get.
02:29
All right.
02:35
Okay.
02:36
So in the first year, we have 8 ,000.
02:43
Is the cash inflow.
02:46
We have 8 ,300 in the second year.
02:52
We have 8 ,300 in the third year and we have 8 ,300 in the third year and we have 8 ,100 in the fourth year.
03:07
Okay, i'll try to include not to sure if this is okay, so basically looking at the present value, there is a general formula that we need to be accustomed to.
03:24
For the present value, i'll use a different pen here.
03:29
The present value should be equal to the future value over one plus the discount rate and to the power of n.
03:41
Okay so if you are going to determine the factor that we are going to be using the a it's basically going to be one over um one plus uh r to the power of n that's the discount factor that we are going to be using in this instance okay so we don't need to discount the initial capital outlay because it is a present value on its own so it is the present value on its own.
04:14
So we're basically going to have that as the initial capital outlay.
04:21
But what we're going to discount is the year one cash flow.
04:28
So like we said, the discount factor is going to, you're going to multiply this by the discount factor which is one over, one over, in brackets one plus r, the power n okay so if you're going to punch in your calculator one plus r and in this case the r is given as 15 so we're going to have to substitute that so we have 15 % which can then be written as 0 .15 right so if you punch in your your calculator you should find that the discount factor is actually let me do that quickly 0 .86565 that's what you're going to find but for for us not just to round off our figures and not to lose values in rounding off i'll just put it here as you're following through one plus are 0 .15 to the part power in this case is the first year, so it's to the power of one.
05:55
So you can as well look it like that.
05:57
You do the same for year two, but in this case, instead of one plus 0 .15 to the power of 1 is the second year, so it's going to be to the power of two and represents the number of periods.
06:14
Okay, so 1 plus 1 plus 0 .15 to the power of 3 is the third year.
06:23
That's the third period.
06:26
And 1 over 1 plus 0 .15 to the power of 4 is the 4th year.
06:37
So if you are going to get your results, you notice in the first year, the present value of 8 ,000 ,000...