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able ltd is considering anew project
initial cost-$300000
expected life-5years
estimated scrap value -$20000
addition revenue for the project-$120000 per year
incremental cost of the project-$30000 per yearcost of capital-10%
ouestions
calculate npv of project
calculate ARRof the project
calculate the pay backi will be glad if i can get how it was calculate and solved. thanks
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Hi Sir,
I guess the explanation to the solution for this question has not been provided. Can you please explain us the solution ?
Regards
Sorry – you are quite correct.
NPV: There is a net cash inflow of 90,000 per annum for 5 years – use the 5 year annuity discount factor to discount. There is also an inflow of 20,000 in 5 years time – use the normal 5 year discount factor to discount.
ARR: the average profit per annum = 90,000 – depreciation. Depreciation = (300,000 – 20,000) / 5 = 56,000. So profit = 34,000.
Average investment = (300,000 + 20,000) / 2 = 160,000
ARR = 34,000 / 160,000 = 21%Payback period: After 3 years they have got back 3 x 90,000 = 270,000, so they need another 30,000. They get 90,000 in the 4th year, so 30,000 will take 30/90 = 0.33 of the 4th year. So total payback period = 3.33 years.
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