[jeff]

Welcome to the Q1 2017 CPA Exam Study Group for BEC. 🙂

Jeff Elliott, CPA (KS) | Another71 | NINJA CPA | NINJA CMA | NINJA CPE

[Anonymous]

@Rosy0407 – thank you!

@wei ng
I'm not practicing writing out the whole memo, but this might be cause I'm comfortable with writing in general.
I'm practicing more on brainstorming the technical content and buzzwords I can use to answer the questions.
It's computer graded so while format is important, the terms you select to use have more weight.. at least in my opinion.

[Anonymous]

Are you guys memorizing the Balance of Payments for Economics?
(calculating balance of trade, balance of services, current account balance, capital account balance)

[Theodore]

@wei ing I have not practiced the written portion this time around. I agree with ^^ Format and content works, but using big terms helps a lot.

FAR: 66, 76!
REG: 76!
AUD: 72, 9/7/2016
BEC: TBA

Don't Stop When You Are Tired, Stop When You Are Done.

[cottonkandi]

@C Im

D is the correct answer. Another way to do it is to calculated the after-tax cash flow first and then add back the depreciation tax shield.

After-tax cashflow: 90,000* .7 = 63,000
Tax Shield: 270000/9 = 30,000 * .3 = 9,000
Increase in annual net after-tax cash flow = After-tax cashflow + tax shield = 63,000 + 9,000 = 72,000

Net Initial Investment= Cost of Equipment + Installation = 250,000 + 20,000 = 270,000

Payback Period = Net Initial Investment/Increase in annual net after-tax cashflow

270,000/72,000 = 3.75

[Anonymous]

@allergic2mornings Thanks! That seems like a simpler method 🙂

[Jsn3004]

Which of the following characteristics represent an advantage of the internal rate of return technique over the accounting rate of return technique in evaluating a project?

I. Recognition of the project's salvage value.
II. Emphasis on cash flows.
III. Recognition of the time value of money.

A: I only.
B: I and II.
C: II and III.
D: I, II, and III.

Answer is C.

I'm sorry but how is II also correct?! Last time I checked
Accounting rate of return = (Net cash inflow – Depreciation) ÷ Investment

[Anonymous]

@jsn3004

I believe the numerator for Accounting rate of return is on an annual basis. Maybe this is why?
(Annual net income – depreciation)/Investment

[cottonkandi]

@jsn3004 – I think the trick word there is emphasis – there are more than one way that ARR can be calculated but I don't think there's a emphasis on using cashflows to determine the number. Maybe the question should have specified that NPV of cashflows is used in IRR vs ARR- that would make more sense. Thanks for posting, really made me think about it. I didn't know net cash inflow can be used to calculate ARR (I had to research it).

[cottonkandi]

@jsn3004 After doing further research I found out the following:

“It uses accounting income rather than cash flow information. Thus it is not suitable for projects which having high maintenance costs because their viability also depends upon timely cash inflows.”

Accounting Income: Cash inflow – Depreciation

Information about this can be found in the following link below:

https://accountingexplained.com/managerial/capital-budgeting/arr

[wng1885]

Could someone help me understand the difference between Accounting Rate of return, Internal rate of return and Net Present value?

[cottonkandi]

@wei ny I'll give it a try. Hope this explanation helps.

Cash outflow = initial investment + capitalized expenses (You don't calculated the time value of money on this number)
After Tax Cash Inflow = Cash Inflow *(1-Tax Rate)
Depreciation Tax Shield = Depreciation Expense * Tax Rate
Present Value of Cash Inflow = (After- Tax Cash Inflow + Depreciation Tax Shield) * PV of ordinary annuity]

Special things to remember: Calculate the PV of ordinary annuity not annuity due (I observed some problems contained this information), PV of annuity due is calculated when the payment is made at the beginning of a period.

Now plug above into the formula below.

NPV = Present Value of annuity of Cash Inflow – cash outflow + Present Value of $1 of the last year cash inflow (if the number is given separately and is different from the annual cashflow amount)

IRR occurs when NPV = 0 <— I couldn't really find a formula for this. But ask yourself, what causes NPV to be zero?

NPV = 0 when Present Value of cash inflow = Cash outflow

I'm not too familiar with ARR but the link in my previous post should help.

[mtaylo24]

Yuck, I can't stand those working capital ratio effect questions, i.e. current ratio > 1 increase/decrease…smh!

AUD - 1st - 60 (12/12), 61 (2/13), 61 (8/13), 78! (11/15)
REG - 55 (2/16) 69 (5/16) Retake(8/16)
BEC - 71(5/16) Retake (9/16)
FAR - (8/16)

[Theodore]

@mtaylo24 I find that if you plug in numbers to the ratio formulas, it helps understand the impact of the ratios.

FAR: 66, 76!
REG: 76!
AUD: 72, 9/7/2016
BEC: TBA

Don't Stop When You Are Tired, Stop When You Are Done.

[mtaylo24]

^^^^Thanks, That's where I winded up whenever I finished the sub-unit…i just cringe everytime I get to that subunit. Now if only ECON effects were that simple 🙂

AUD - 1st - 60 (12/12), 61 (2/13), 61 (8/13), 78! (11/15)
REG - 55 (2/16) 69 (5/16) Retake(8/16)
BEC - 71(5/16) Retake (9/16)
FAR - (8/16)

[Anonymous]

@wei nj

Net Present Value is the difference between the present value of your cash inflows and the present value of your cash outflows. If your NPV > 1, it would be a positive thing because your inflows are greater than your outflows.

Internal Rate of Return is the discount % that makes your NPV = 0, meaning at what rate will my inflows be equal to my outflows (break even)?

Accounting Rate of Return is something I am very confused about. What is the difference between this and Return on Investment?

[Author]

Replies