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Good Day Sir!
I have attempted the Revision Mock Exam and am not able to calculate the NPV correctly in Section B Question 1 (a) of the exam.
I calculated using the amount $90000 ($120000-$30000) each year at 10% discounting factor for 5 years and $20000 scrap value at 10% discounting factor in the 5th year and got the answer $53520 NPV (which after the results I found to be wrong) and it is showing the right answer to be $53610 NPV. Please explain the correct method of solving the above question.And also please tell me how to calculate ARR in the same question (b).
Thank you
For 1(a) it looks like the difference is purely a rounding difference (did you use the discount tables given, or calculate the factors yourself?). This will not be a problem in the exam because to avoid rounding problems, questions ask for the answer to (for example) the nearest thousand.
For question 1(b) see the following link
:https://opentuition.com/topic/mock-exam-section-b/I used the given discounting tables only but I calculated the PV separately for each year.
Now I understand both parts but I still have one doubt in 1(a) why was annuity table used instead of present value table.
Thank you
It is quicker to use the annuity factor because it is an equal cash flow each year.
It doesn’t matter if you discount each year separately (it gives a rounding difference but that doesn’t matter in the exam), but it does take longer and one of the biggest problems in the exam is the time pressure.
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