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Question 1.2
A company’s management is considering investing in a project with an expected life of 4 years. It has a
positive net present value of $180,000 when cash flows are discounted at 8% per annum. The project’s
cash flows include a cash outflow of $100,000 for each of the four years. No tax is payable on projects of
this type.
The percentage increase in the annual cash outflow that would cause the company’s management to
reject the project from a financial perspective is, to the nearest 0.1%:A 54.3%
B 45.0%
C 55.6%
D 184.0%(2 marks)
The correct answer is A.
Workings
Net Present Value of the project = $180,000
Present value of the annual cash outflow = $100,000 x 3.312* = $331,200
Sensitivity = $180,000/$331,200 = 54.3%[*Please assist with how to calculate 3.312 as the multiply amount when calculating the present value of the annual cash outflow as per the above workings.
I am not sure if I am entering the incorrect info into my calculator.]Hi there, the 3.312 does not need to be entered into your calculator because its given in the annuity/ cumulative present value tables which are provided in the CIMA exams.
You need to look at the 8% column for the 4year row and use this figure which is 3.312.
However, most importantly CIMA removed net present value calculations from the P1 syllabus in 2015 – so this is not examinable on this paper (only need this for CIMA P2)Kind Regards
Cath
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