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Another question from the mock paper which i can’t seem to grasp. I re-watched the lecture videos and am more confused than ever with the following questions:
Able Ltd is considering a new project, details below:
Initial cost: $300,000
Expected life: 5 years
Estimate scrap value: $20,000
Addition revenue from project: $120,000 per year
Incremental costs from project: $30,000 per year
Cost of Capital: 10%a) calculate net present value of project
b) calculate the accounting rate of return
c) calculate the payback period for the projectI don’t know whether to add the $300k together with ($30k x 5) to start with for costs of the project
Please help
Only 300K is spent now.
The inflow each year is 120,000 for each of 5 years, but there are also extra costs of 30,000 each year.
So there is a net inflow of 90,000 per year for 5 years (and you discount this using the 5 year annuity factor at 10%.
Finally, there is scrap of 30,000 in 5 years time – this is discounted using the normal 5 year discount factor at 10%.
Thanks for that. I was using the Present Value Table for each year to work out what the Present value of £90k which accumulated to a slightly different figure if when i used the annuity value.
For part B is the accounting rate of return the same as internal rate of return? If so the answer is 21% but this is hard to work out if the present value figure table go only to 20%.
Part C i have understood as it is not discounted, so it is the accumulation of $90k until the $300k is paid back.
Once again, thank you for answering my queries.
The accounting rate of return is not the same as the IRR. It is the average profit as a percentage of the average investment.
You are correct about the payback period.
There are free lectures on all of this, working through examples.
Hi,
Thank you so much for the ACCA resources provided. May God continue to bless you.
I have attempted the question as stated by Mandip based on your response. However, I am getting 53589 as against the obvious answer of $53,610. I don’t know where I went wrong but I calculated the NPV using 90,000 as inflows and 300,000 as initial investment. Then I added the discounted scrap value.Hello
I have attempted many times but didn’t get 53610$
Would you please help me.
if calculated without rounding
1)0.909 x 90000=81810 81818
2)0.826 x 90000=74340 74380
3) 0.751 x 90000=67590 67618
4)0.683 x 90000= 61470 61471
5)0.621 x 90000= 55890 55883
5)0.621 x 20000=12420 12418
Summ 353520 353588Please. Thank you very much!
Your difference is due to roundings in the tables, which is not a problem in the exam.
Because it is an annuity of 90,000 a year, it is easier and quicker to multiply by the annuity factor instead of by each individual present value factors.
Because of roundings in the tables, the answer ends up slightly different.
It will not be a problem in the exam because they ask for the answer to the nearest thousand 🙂 Nobody is worried about a few 100 difference (either in exams or in real life – it is not relevant 🙂 )
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