Question Tag: Internal Rate of Return

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PSAF – Nov 2023 – L2 – Q4 – Performance Measurement in the Public Sector

Calculate the NPV, IRR, and ROCE for FFTA’s investment in a second rail coach to meet increased passenger demand.

Question

Fakafiki Federal Transport Agency (FFTA) introduced a new rail coach, Luxury DV, to its range last year. The coach is used to transport passengers, addressing a serious bottleneck in the transportation process, with a maximum capacity to transport 5,000 passengers per annum.

The Luxury DV product has been a huge success, and consequently, all passengers showing interest were accommodated. Based on feedback from high-net-worth customers, the marketing department has prepared the following demand forecast for future years:

Year	1	2	3	4
Demand (Number of passengers)	7,000	9,000	11,000	4,000

The Directors of FFTA are now considering investing in a second coach that will allow the company to satisfy the increasing demand. The following information relating to this investment proposal has now been prepared:

Initial investment: N350,000
Maximum additional passengers: 5,000 passengers
Current fare: N450 per passenger
Variable cost of operation: N200 per passenger
Fixed operating costs: N175,000

If tickets issued remain at 5,000, the current fare would continue for the remainder of the coach’s life. However, if passenger traffic is increased, the fare is expected to fall to N400 per passenger for all tickets sold. This fare adjustment will last for the remaining life of the coach.

No terminal value or coach scrap value is expected at the end of four years, when Luxury DV’s passenger service is planned to end. For investment appraisal purposes, FFTA uses a nominal discount rate of 10% per year and a target return on capital employed of 20% per year. Ignore taxation.

Required: Using an incremental approach, calculate the following values for the investment proposal of the second coach.

a. Net present value. (10 Marks)
b. Internal rate of return. (4 Marks)
c. Return on capital employed (accounting rate of return) based on initial investment. (6 Marks)

Answer

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Tags: estment Appraisal, Internal Rate of Return, Net Present Value, Return on Capital
Level: Level 2

Topic: Performance Measurement in the Public Sector

BMF – Nov 2014 – L1 – SB – Q4 – Investment Decisions

Appraise a proposed investment using the Internal Rate of Return and evaluate the use of the Accounting Rate of Return.

Question

Management decisions regarding the acquisition of non-current assets and other long-term investments involve huge capital outlay, and they are critical to the future profitability and success of the company.

Gboza Limited proposed to buy a plant costing N2,000,000 which is expected to generate annual net cash flow of N600,000 for six years at a cost of capital of 10%.

Required:

a. Appraise the project using the internal rate of return. (13 Marks)
b. Should the plant be purchased? (2 Marks)
c. State TWO advantages and THREE disadvantages of accounting rate of return (ARR) as an investment appraisal technique. (5 Marks)

(Total 20 Marks)

Answer

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Tags: Accounting Rate of Return, Capital Budgeting, Internal Rate of Return, Investment Appraisal
Level: Level 1

Topic: Investment Decisions
Series: NOV 2014

QTB – May 2015 – L1 – SA – Q4 – Operations Research

Understanding when a business venture is considered worthwhile.

Question

A business venture is considered as worthwhile when the:

A. Present value of revenue is positive
B. Present value of the cost is positive
C. Net present value is positive
D. Net present value is equal to zero
E. Internal rate of return is positive

Answer

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Tags: Internal Rate of Return, Net Present Value, Present Value
Level: Level 1

Topic: Operations Research
Series: MAY 2015

PSAF – MAY 2019 – L2 – Q7 – Performance Measurement in the Public Sector

Compare NPV and IRR methods, state decision rules, and apply NPV to evaluate two investment projects for selection.

Question

a. Distinguish between net present value (NPV) and internal rate of return (IRR) and state the decision rule under both criteria. (8 Marks)

b. Two projects A and B have initial capital investment of N900,000 each. The cash inflows of the two projects are as follows:

Required:
i. As a financial analyst, calculate the net present value (NPV) of the two projects given a cost of capital of 12%. (6 Marks)
ii. Based on the results obtained in (i), which of the projects should be chosen? (1 Mark)

Answer

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Tags: Discounted Cash Flow, Internal Rate of Return, Investment Appraisal, Net Present Value, Project Selection
Level: Level 2

Series: MAY 2019

BMF – May 2017 – L1 – SB – Q6b – Investment Decisions

Lists five advantages and disadvantages each of using IRR in capital investment appraisal.

Question

State FIVE advantages and disadvantages each of Internal Rate of Return (IRR) as a method used in appraising capital investments.

Answer

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Tags: Capital Budgeting, Internal Rate of Return, Investment Appraisal, IRR Advantages and Disadvantages
Level: Level 1

Topic: Investment Decisions
Series: MAY 2017

QT – May 2019 – L1 – Q2b – Mathematics of Business Finance

Calculate NPV and IRR for two machines and determine which machine yields a better return.

Question

BonBone Company Ltd wants to make a decision on which of the two machines to purchase. Each will involve a GH¢10,000 investment. The expected net incremental cash flows are given by the table below:

Year	Machine I (GH¢)	Machine II (GH¢)
1	5,000.00	2,000.00
2	4,000.00	3,000.00
3	2,000.00	5,000.00
4	2,000.00	4,000.00

Required:

i) If the company’s cost of capital is 10%, calculate the Net Present Value (NPV) of Machine I and Machine II and determine which machine should be purchased for higher returns. (8 marks)

ii) If the initial investment for Machine I is changed to GH¢4,000 and Machine II is changed to GH¢2,000, calculate the Internal Rate of Return (IRR) for Machine I and Machine II. (6 marks)

iii) If the IRRs in (ii) above are to be used as the basis of selection, determine which machine should be purchased for higher returns. (2 marks)

Answer

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Tags: Capital Budgeting, Discounting, Internal Rate of Return, Investment Decision, Net Present Value

Topic: Mathematics of Business Finance
Series: MAY 2019

QT – May 2019 – L1 – Q2a – Mathematics of Business Finance

Distinguish between IRR and NPV, and evaluate investment decisions using NPV and IRR.

Question

Distinguish between Internal Rate of Return and Net Present Value. (4 marks)

Answer

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Tags: Capital Budgeting, Discounting, Internal Rate of Return, Investment Decision, Net Present Value
Level: Level 1

Topic: Mathematics of Business Finance
Series: MAY 2019

MA – Aug 2022 – L2 – Q4a – Discounted Cash Flow

This question involves calculating the IRR to assess the viability of acquiring a new plant for Tanko Ltd.

Question

Tanko Ltd (TL) is engaged in the manufacturing and sale of a single product GG. The existing manufacturing plant is being operated at full capacity of 6,000 units per annum, but the production is not sufficient to meet the growing demand of GG. TL is considering replacing its existing plant with a new Japanese plant. The production capacity of the new plant would be 50% more than the existing capacity. The board of TL considers this expansion a high-risk investment and requires a minimum expected rate of return of 15% on its investment.

To assess the viability of this decision, the following information has been gathered:
i) The purchase cost and installation cost of the new plant will amount to GH¢3.14 million and GH¢0.45 million, respectively.
ii) The supplier would send a team of engineers to Ghana for final inspection of the plant before commissioning at a cost of GH¢120,000. 50% of this cost would be borne by TL.
iii) As a result of the installation of the new plant, fixed costs other than depreciation would increase by GH¢0.3 million per annum.
iv) The existing plant has an estimated life of 10 years and has been in use for the last 6 years. The machine supplier has offered to purchase the existing plant immediately at GH¢1.6 million.
v) During the latest year, 6,000 units were sold at an average selling price of GH¢550 per unit. Variable manufacturing cost was GH¢450 per unit. TL expects to increase sales volume by 25% in the first year after the plant’s installation. Thereafter, the sales volume would increase by 4% per annum. Selling price and variable manufacturing cost will increase by 5% per annum.
vi) The new plant would be depreciated using the straight-line method. The residual value of the plant at the end of its useful life of 4 years is estimated at GH¢350,000.
vii) TL’s cost of capital is 12%.

Required:
Using break-even rate (internal rate of return), advise whether TL should acquire the new plant.

Answer

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Tags: Capital Budgeting, Cash Flow Projections, Internal Rate of Return, Investment Appraisal
Level: Level 2

Topic: Discounted cash flow
Series: AUG 2022

MA – July 2023 – L2 – Q4a – Discounted cash flow

Calculate the cost of capital for a delivery van investment using IRR, and compare payback and discounted cash flow methods of investment appraisal.

Question

a) Johnson & Co is a medium sized company that is engaged in delivery services. As a result
of the recent increase in the demand for services, the Managing Director (MD) is planning
for the future business performance. The MD plans to acquire a delivery van at the cost of
GH¢85,000. The expected net cash flow per year are as follows:

The Sales Manager has indicated to the MD that he will recoup his investment in less than four years and for that reason, it’s a good investment.

The Management Accountant has however drawn his attention to the fact that the manager has not factored time value of money and the cost of capital in his analysis. He could not however suggest the cost of capital since financial institutions are charging different interest rates.

Required:

i) Calculate the cost of capital when used would result in a break-even, when the useful life of the van is five years with residual value of GH¢8,500. (11 marks)

ii) Using TWO (2) points each, compare and contrast the payback method of investment appraisal and the discounted cash flow method.

(4 marks)

Answer

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Tags: Capital Budgeting, Internal Rate of Return, Investment Appraisal, Net Present Value, Payback Period
Level: Level 2

Topic: Discounted cash flow
Series: JULY 2023

FM – May 2021 – L2 – Q4a – Introduction to investment appraisal

Evaluate the financial viability of an investment using NPV, IRR, and explain the concept of sensitivity analysis.

Question

CVD Ghana Ltd, which is into the production and sale of COVID-19 vaccine in Ghana and abroad, plans to buy a new machine to expand the scope of its operations due to increased demand in both the local and the international markets.

The cost of the machine is GH¢24,000,000 and has a useful life of five years. The machine will require additional investment in working capital of GH¢2,700,000 at the beginning of the first year of operations. At the end of year five, the machine will be sold for scrap, with the scrap value expected to be 5% of the machine’s initial purchase cost. The company has no intention to replace the machine. Production and sales from the new machine are expected to be 1,000,000 packs per year.

The selling price per pack and variable cost per pack are as follows:

Year	Selling Price per Pack (GH¢)	Variable Cost per Pack (GH¢)
1	48	33
2	48	33
3	55	38
4	55	38
5	60	42

It is also estimated that incremental fixed costs arising from the machine’s operations will be GH¢4,800,000 per year. CVD Ghana Ltd has an after-tax cost of capital of 20%, which it uses as a discount rate in its investment appraisal. The company pays corporate tax at an annual rate of 25% per year. Capital allowance should be ignored.

Required:

i) Compute the Net Present Value of this project and advise CVD Ghana Ltd whether the investment is financially viable. (8 marks)

ii) Calculate the Internal Rate of Return of investing in the machine and advise whether it is financially viable. (5 marks)

iii) Explain the meaning of the term “sensitivity analysis” in the context of investment. (2 marks)

Answer

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Tags: Internal Rate of Return, Investment Decision, Net Present Value, Sensitivity Analysis
Level: Level 2

Topic: Introduction to Investment Appraisal
Series: MAY 2021

PSAF – Nov 2023 – L2 – Q4 – Performance Measurement in the Public Sector

Calculate the NPV, IRR, and ROCE for FFTA’s investment in a second rail coach to meet increased passenger demand.

Question

Year	1	2	3	4
Demand (Number of passengers)	7,000	9,000	11,000	4,000

Initial investment: N350,000
Maximum additional passengers: 5,000 passengers
Current fare: N450 per passenger
Variable cost of operation: N200 per passenger
Fixed operating costs: N175,000

Required: Using an incremental approach, calculate the following values for the investment proposal of the second coach.

a. Net present value. (10 Marks)
b. Internal rate of return. (4 Marks)
c. Return on capital employed (accounting rate of return) based on initial investment. (6 Marks)

Answer

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Tags: estment Appraisal, Internal Rate of Return, Net Present Value, Return on Capital
Level: Level 2

Topic: Performance Measurement in the Public Sector

BMF – Nov 2014 – L1 – SB – Q4 – Investment Decisions

Appraise a proposed investment using the Internal Rate of Return and evaluate the use of the Accounting Rate of Return.

Question

Gboza Limited proposed to buy a plant costing N2,000,000 which is expected to generate annual net cash flow of N600,000 for six years at a cost of capital of 10%.

Required:

(Total 20 Marks)

Answer

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Tags: Accounting Rate of Return, Capital Budgeting, Internal Rate of Return, Investment Appraisal
Level: Level 1

Topic: Investment Decisions
Series: NOV 2014

QTB – May 2015 – L1 – SA – Q4 – Operations Research

Understanding when a business venture is considered worthwhile.

Question

A business venture is considered as worthwhile when the:

A. Present value of revenue is positive
B. Present value of the cost is positive
C. Net present value is positive
D. Net present value is equal to zero
E. Internal rate of return is positive

Answer

Find Related Questions by Tags, levels, etc.

Tags: Internal Rate of Return, Net Present Value, Present Value
Level: Level 1

Topic: Operations Research
Series: MAY 2015

PSAF – MAY 2019 – L2 – Q7 – Performance Measurement in the Public Sector

Compare NPV and IRR methods, state decision rules, and apply NPV to evaluate two investment projects for selection.

Question

a. Distinguish between net present value (NPV) and internal rate of return (IRR) and state the decision rule under both criteria. (8 Marks)

b. Two projects A and B have initial capital investment of N900,000 each. The cash inflows of the two projects are as follows:

Answer

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Tags: Discounted Cash Flow, Internal Rate of Return, Investment Appraisal, Net Present Value, Project Selection
Level: Level 2

Series: MAY 2019

BMF – May 2017 – L1 – SB – Q6b – Investment Decisions

Lists five advantages and disadvantages each of using IRR in capital investment appraisal.

Question

State FIVE advantages and disadvantages each of Internal Rate of Return (IRR) as a method used in appraising capital investments.

Answer

Find Related Questions by Tags, levels, etc.

Tags: Capital Budgeting, Internal Rate of Return, Investment Appraisal, IRR Advantages and Disadvantages
Level: Level 1

Topic: Investment Decisions
Series: MAY 2017

QT – May 2019 – L1 – Q2b – Mathematics of Business Finance

Calculate NPV and IRR for two machines and determine which machine yields a better return.

Question

BonBone Company Ltd wants to make a decision on which of the two machines to purchase. Each will involve a GH¢10,000 investment. The expected net incremental cash flows are given by the table below:

Year	Machine I (GH¢)	Machine II (GH¢)
1	5,000.00	2,000.00
2	4,000.00	3,000.00
3	2,000.00	5,000.00
4	2,000.00	4,000.00

Required:

i) If the company’s cost of capital is 10%, calculate the Net Present Value (NPV) of Machine I and Machine II and determine which machine should be purchased for higher returns. (8 marks)

ii) If the initial investment for Machine I is changed to GH¢4,000 and Machine II is changed to GH¢2,000, calculate the Internal Rate of Return (IRR) for Machine I and Machine II. (6 marks)

iii) If the IRRs in (ii) above are to be used as the basis of selection, determine which machine should be purchased for higher returns. (2 marks)

Answer

Find Related Questions by Tags, levels, etc.

Tags: Capital Budgeting, Discounting, Internal Rate of Return, Investment Decision, Net Present Value

Topic: Mathematics of Business Finance
Series: MAY 2019

QT – May 2019 – L1 – Q2a – Mathematics of Business Finance

Distinguish between IRR and NPV, and evaluate investment decisions using NPV and IRR.

Question

Distinguish between Internal Rate of Return and Net Present Value. (4 marks)

Answer

Find Related Questions by Tags, levels, etc.

Tags: Capital Budgeting, Discounting, Internal Rate of Return, Investment Decision, Net Present Value
Level: Level 1

Topic: Mathematics of Business Finance
Series: MAY 2019

MA – Aug 2022 – L2 – Q4a – Discounted Cash Flow

This question involves calculating the IRR to assess the viability of acquiring a new plant for Tanko Ltd.

Question

Required:
Using break-even rate (internal rate of return), advise whether TL should acquire the new plant.

Answer

Find Related Questions by Tags, levels, etc.

Tags: Capital Budgeting, Cash Flow Projections, Internal Rate of Return, Investment Appraisal
Level: Level 2

Topic: Discounted cash flow
Series: AUG 2022

MA – July 2023 – L2 – Q4a – Discounted cash flow

Calculate the cost of capital for a delivery van investment using IRR, and compare payback and discounted cash flow methods of investment appraisal.

Question

The Sales Manager has indicated to the MD that he will recoup his investment in less than four years and for that reason, it’s a good investment.

Required:

i) Calculate the cost of capital when used would result in a break-even, when the useful life of the van is five years with residual value of GH¢8,500. (11 marks)

ii) Using TWO (2) points each, compare and contrast the payback method of investment appraisal and the discounted cash flow method.

(4 marks)

Answer

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Tags: Capital Budgeting, Internal Rate of Return, Investment Appraisal, Net Present Value, Payback Period
Level: Level 2

Topic: Discounted cash flow
Series: JULY 2023

FM – May 2021 – L2 – Q4a – Introduction to investment appraisal

Evaluate the financial viability of an investment using NPV, IRR, and explain the concept of sensitivity analysis.

Question

The selling price per pack and variable cost per pack are as follows:

Year	Selling Price per Pack (GH¢)	Variable Cost per Pack (GH¢)
1	48	33
2	48	33
3	55	38
4	55	38
5	60	42

Required:

i) Compute the Net Present Value of this project and advise CVD Ghana Ltd whether the investment is financially viable. (8 marks)

ii) Calculate the Internal Rate of Return of investing in the machine and advise whether it is financially viable. (5 marks)

iii) Explain the meaning of the term “sensitivity analysis” in the context of investment. (2 marks)

Answer

Find Related Questions by Tags, levels, etc.

Tags: Internal Rate of Return, Investment Decision, Net Present Value, Sensitivity Analysis
Level: Level 2

Topic: Introduction to Investment Appraisal
Series: MAY 2021

Question Tag: Internal Rate of Return

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PSAF – Nov 2023 – L2 – Q4 – Performance Measurement in the Public Sector

Calculate the NPV, IRR, and ROCE for FFTA’s investment in a second rail coach to meet increased passenger demand.

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BMF – Nov 2014 – L1 – SB – Q4 – Investment Decisions

Appraise a proposed investment using the Internal Rate of Return and evaluate the use of the Accounting Rate of Return.

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QTB – May 2015 – L1 – SA – Q4 – Operations Research

Understanding when a business venture is considered worthwhile.

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PSAF – MAY 2019 – L2 – Q7 – Performance Measurement in the Public Sector

Compare NPV and IRR methods, state decision rules, and apply NPV to evaluate two investment projects for selection.

You're reporting an error for "PSAF – MAY 2019 – L2 – Q7 – Performance Measurement in the Public Sector"

BMF – May 2017 – L1 – SB – Q6b – Investment Decisions

Lists five advantages and disadvantages each of using IRR in capital investment appraisal.

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QT – May 2019 – L1 – Q2b – Mathematics of Business Finance

Calculate NPV and IRR for two machines and determine which machine yields a better return.

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QT – May 2019 – L1 – Q2a – Mathematics of Business Finance

Distinguish between IRR and NPV, and evaluate investment decisions using NPV and IRR.

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MA – Aug 2022 – L2 – Q4a – Discounted Cash Flow

This question involves calculating the IRR to assess the viability of acquiring a new plant for Tanko Ltd.

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MA – July 2023 – L2 – Q4a – Discounted cash flow

Calculate the cost of capital for a delivery van investment using IRR, and compare payback and discounted cash flow methods of investment appraisal.

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FM – May 2021 – L2 – Q4a – Introduction to investment appraisal

Evaluate the financial viability of an investment using NPV, IRR, and explain the concept of sensitivity analysis.

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PSAF – Nov 2023 – L2 – Q4 – Performance Measurement in the Public Sector

Calculate the NPV, IRR, and ROCE for FFTA’s investment in a second rail coach to meet increased passenger demand.

You're reporting an error for "PSAF – Nov 2023 – L2 – Q4 – Performance Measurement in the Public Sector"

BMF – Nov 2014 – L1 – SB – Q4 – Investment Decisions

Appraise a proposed investment using the Internal Rate of Return and evaluate the use of the Accounting Rate of Return.

You're reporting an error for "BMF – Nov 2014 – L1 – SB – Q4 – Investment Decisions"

QTB – May 2015 – L1 – SA – Q4 – Operations Research

Understanding when a business venture is considered worthwhile.

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PSAF – MAY 2019 – L2 – Q7 – Performance Measurement in the Public Sector

Compare NPV and IRR methods, state decision rules, and apply NPV to evaluate two investment projects for selection.

You're reporting an error for "PSAF – MAY 2019 – L2 – Q7 – Performance Measurement in the Public Sector"

BMF – May 2017 – L1 – SB – Q6b – Investment Decisions

Lists five advantages and disadvantages each of using IRR in capital investment appraisal.

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QT – May 2019 – L1 – Q2b – Mathematics of Business Finance

Calculate NPV and IRR for two machines and determine which machine yields a better return.

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QT – May 2019 – L1 – Q2a – Mathematics of Business Finance

Distinguish between IRR and NPV, and evaluate investment decisions using NPV and IRR.

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MA – Aug 2022 – L2 – Q4a – Discounted Cash Flow

This question involves calculating the IRR to assess the viability of acquiring a new plant for Tanko Ltd.

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MA – July 2023 – L2 – Q4a – Discounted cash flow

Calculate the cost of capital for a delivery van investment using IRR, and compare payback and discounted cash flow methods of investment appraisal.

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FM – May 2021 – L2 – Q4a – Introduction to investment appraisal

Evaluate the financial viability of an investment using NPV, IRR, and explain the concept of sensitivity analysis.

You're reporting an error for "FM – May 2021 – L2 – Q4a – Introduction to investment appraisal"

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