Finance and Financial Management
What the exam tests
Investment appraisal, cost of capital, working capital management and risk, using tenge cash flows and Kazakhstan market conditions. Questions test NPV, IRR, WACC and the cash conversion cycle.
Core rules
- NPV = present value of future cash flows − initial outlay. Accept a project if NPV is positive.
- WACC = E/V × Ke + D/V × Kd × (1 − tax rate). Use market values for weights.
- IRR is the discount rate at which NPV equals zero; it assumes reinvestment at the IRR, which may be unrealistic.
- Payback ignores the time value of money and is only a screening tool.
- Cash conversion cycle = inventory days + receivable days − payable days.
Worked example
A project costs KZT 10m and generates KZT 4m net cash inflow annually for four years. At a 12% discount rate, the four-year annuity factor is 3.037. PV = 4m × 3.037 = KZT 12.148m. NPV = KZT 2.148m, so accept. At 20%, the factor is 2.589 and NPV is KZT 0.356m; still positive but much lower. The fall shows how the hurdle rate reflects risk and the cost of capital.
Traps
Discounting accounting profit instead of cash flow; using book rather than market weights in WACC; ignoring working capital and tax; comparing IRR with an accounting return; forgetting that inflation and tenge depreciation affect cash flows.