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Good day John,
I have attempted the mock exam question F2 on open tuition.
But i could not get the answer for Section B, question 1(a) and question 1(b).
Don’t mind to explain on how to get the answer 53610 for (1a) and 21 for (1b)?
Thank you.
For question 1 (a) the cash flows are:
0 (300,000)
1-5 120,000 – 30,000 = 90.000 p.a.
5 20,000Discounting the annuity using the 5 year annuity factor gives a PV of 341,190
Discounting the scrap using the 5 year PV factor gives a PV of 12,420The NPV = 341,190 + 12,420 – 300,000 = 53,610
For question 1 (b):
The total cash inflows from operations = 5 x 90,000 = 450,000
The total depreciation = 300,000 – 20,000 = 280,000
The total profit = 450,000 – 280,000 = 170,000
The average profit per year = 170,000 / 5 = 34,000The average value of the machine = (300,000 + 20,000) / 2 = 160,000
Therefore the ARR = 34,000 / 160,000 = 21.25%
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