Calaculate NAV for the following Assets -$250m LIabilities - 25m Shares outstanding - 10.5m Base management fee -0.75% This is the question from schweser book While calculating the NAV they have NOT included the Base management fee, Their solution says - (225-25)/10.5 = 21.43 Instead it should be (225-25)(1-0.0075)/10.5 == 21.267$ I know it s very basic stuff, but still can anyone pls clarify?

Also there is anothr question… Investor makes 1m dollars investments in VC Expected return in 4 yrs is 5m dollars Cost of capital = 10% probability of Faliure is 10%,15%, 20%, 15% What is the NPV of the project? ---- Soln P(sucess) =0.5202 P(failure) = 0.4798 PV of 5m dollars @ 10% is 5,000,000/1.1^4 = 3.415m dollars The NPV of the project is (3.415m * 0.5202) +(-1m *0.4798) =1.7764m - 0.4798m =1.2966m or 1,296,600 dollars The schweser solutions doesnt associate the “P(failure) = 0.4798” factor while calculating ht NPV and the solution states NPV = (3.415m * 0.5202) +(-1m ) = 775,834 dollars This question is prsent in Schweser book pg 265 Thanks

varun - irrespective of failure or success - the 1 mill. $ investment is sunk in. So the entire 1 million and not 0.4798 * 1 million needs to be removed. only if success - you make 3.415 Million. But spend the 1 mill nevertheless.

You should invest in mutual funds.

You were right varundarji, based on the traditional formula of expected return.

Is my understanding correct on the first question? Btw NYCAnalyst86, Thanks for the advice!

I am saying that you should invest in mutual funds because then you would know, (from real-life experience, not from reading CFAI or Schweser or Stalla…) that the Management Fee is taken out after NAV is calculated.

with regard to the first question: As per accrual method of accounting, all accrued expenses should be recognized in the profit and loss account and in the balance sheet in the period they are incurred. thus in my opinion, the liabilities of the fund already include the base management fee (based on the accural method of accounting, if not paid). therefore there is no reason of again adding the base management fee in the liablities while calculating NAV. thus the calculation in the answer is correct with respect to not adding the base management fee. With respect to the second question: We have to calculate the expected NPV of the project and we have two scenarios. one is success and the other is failure with their expected probabilities. As per the propoerity of the probability theory the sum of exhaustive and mutually exlusive events should be 1. and in the expected value calculation the weights are essentially the probabilities of outcome of that particular value. Thus if we take 0.5202 probability for the success and 1 for the failure we end up with the total probability of 1.5202. Thereby breaching the property of the probability theory. further, considering that we will loss all money if there is a failure, we should also consider the probability of failure.

Alldbest, so os my understanding correct or no?

This statement is just plain WRONG “Thus if we take 0.5202 probability for the success and 1 for the failure we end up with the total probability of 1.5202. Thereby breaching the property of the probability theory. further, considering that we will loss all money if there is a failure, we should also consider the probability of failure.” I will show you WHY… 0.5202 Probability is only taken for the Cash flows of 3.x Million received on the project being successful. But that was not the NPV of Success. NPV of Success would have been (3.x - 1) And then NPV of Project would have been 0.5202 ( 3.x - 1) + 0.4798 * (-1) --> this can be simplified into 0.5202 ( 3.x ) - 1 and this is what Schweser has done… and they are Right. Does that make sense?

Ok cpk123, so you mean that in any case we have to invest the 1million dollars…so its prorbability shouldnt be taken into consideration"

I meant to say P(S) * (Final Payoff - Initial Investment) --> NPV of Success P(F) * (0 - Initial Investment) -> NPV of Failure --> specifically putting the zero to indicate Final Payoff in a Failure situation is 0. NPV Project = NPV Success + NPV Failure. Also P(S) + P(F) = 1 So simplifying Final Payoff * P(S) - [P(S)+P(F)]*Initial Investment = Final Payoff * P(S) - Initial Investment. Does that make sense? In the above problem initial INvestment happened to be 1 Million Dollars… maybe that is the source of the confusion. The above derivation is the more generic one.

They are right no need to make any changes. Allthebest has explained well. both are right!