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 project
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CAPITAL BUDGETING
8y ago#1Have 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. 20,000
You 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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