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ACCA FM · Guided practice (Show me how)

Chapter 7: Investment appraisal – methods

NPV at the cost of capital, then the IRR by interpolation

(a) Initial investment appraisal. A machine will cost $80,000. It has an expected life of 4 years with an anticipated scrap value of $10,000. Expected net operating cash inflows each year are: year 1 $20,000; year 2 $30,000; year 3 $40,000; year 4 $10,000. The cost of capital is 10% p.a. Calculate the net present value of the investment and determine whether or not it should be accepted.

(b) Alternative discount rate. For the same project: (i) calculate the NPV of the project at an interest rate of 15%; (ii) estimate the IRR of the project using the two net present values.

Present value table factors: at 10%, years 1 to 4: 0.909, 0.826, 0.751, 0.683. At 15%: 0.870, 0.756, 0.658, 0.572. Operating flows arise at the ends of years.

  1. The NPV at 10%

    Calculate the machine's present values and net present value at the specified cost of capital.

  2. NPV at 15% and the IRR

    Calculate the machine's net present value at the second specified rate and estimate its internal rate of return.

Opening this exercise…