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Able ltd is considering a new project for which the following information is available
Initial cost – $300000
Expected life – 5 years
Estimated scrap Value – $20000
Additional revenue from the project – $120000 per year
Incremental costs of the project – 30000 per year
Cost of capital – 10 %Calculate the Net Present Value of the project (to the nearest $)
There is an outflow of 300,000 at time 0.
There is an inflow of 120,000 – 30,000 = 90,000 a year for 5 years, so discount this by using the 5 year annuity discount factor at 10%.
There is an inflow of 20,000 in 5 years time, so discount this using the normal 5 year present value factor.
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90000 discounted at 10% annuity for 5 years = 341190
20000 discounted at 10% normal present value= = 12420
Therefore NPV= 341190 + 12420
= 353610
Is it correct ? Or we also need to add 300000 (initial investment) ?“IRR and NVP will give same accept or reject investment decisions when cash flows are conventional.
What is meant by the above statement ?
And why IRR and NVP will not give same decisions when cash flows are not conventional?
I dont understand what is conventional and unconventional cash flow?
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