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Hai!
Initial Investment $40000
Net cash inflow for 5 years in advance $12000 per annum
Decommissioning cost $15000At a cost of capital 10% what is the NPV?
I didnt get the right the answer. 🙁 And I dont know why the answer is Positive $700.
Since the cash inflows are receivable in advance, the flows are from time 0 to time 4.
So the present value of them is (12,000 + (12,000 x the 4 year annuity factor at 10%) = 50,040.
The present value of the 15,000 in 5 years time = 15,000 x 0.621 = 9315 (and this is negative because it is a cost)So the NPV = 50,040 – 9315 – 40,000 = + 685
Surely there are workings in whichever book you found the question? (If not then you should be using a Revision Kit from one of the ACCA approved publishers 🙂 )
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