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Please help me solve this question :
Initial Cost :300,000
Expected Life: 5 years
Estimated scrap value : 20,000
Additional revenue from the project : 120,000
Incremental cost of the project : 30,000 per year
cost of capital : 10%
1. Calculate the NPV
2. Calculate the Accounting rate of returns of the project
3. Calculate the pay back period for the projectHave you not watched my free lectures on investment appraisal?
For the NPV, the cash flows are:
0 (300,000)
1 – 5 90,000 p.a. (120,000 – 30,000)
5. 20,000You discount the annuity using the 5 year annuity factor at 10%, and the time 5 flow using the normal present value factor at 10%
For the ARR, the average profit is 90,000 – the average depreciation per year. You then divide by the average books value (300,000 + 20,000) / 2
For the payback period you calculate how many years it will take in cash terms to get back the initial 300,000. Since they are getting 90,000 a year, it will take 300,000/90,000 = 3.33 years.
Do watch my free lectures. The lectures are a complete free course for Paper F2 and cover everything needed to be able to pass the exam well.
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