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Hi
Able Ltd is considering a new project, for with the following information is available:
Initial cost – $300,000
Expected life – 5years
Estimated scrap value – $20,000
Addition revenue from the project – $120,000 per year
Incremental costs of the project – $30,000 per year
Cost of capital – 10%Calculate the Net Present Value of the project (to the nearest $)
My answer: 53,520
120,000-30,000= cash inflow per year.
-300000
90000 0.909 81810
90000 0.826 74340
90000 0.751 67590
90000 0.683 61470
90000 0.621 55890
20000 0.621 12420
53520
but the answer was 53,610 can you explain where did I make a mistake?b) Calculate the Accounting Rate of Return of the project (to the nearest %)
this question also relates to the same case but I didn’t get the right answer here also. (my answer was 16.4 but the right one is 21)
thanks in advance
(a) the difference is simply rounding (using individual discount factors obviously gives a slightly different answer than if you had used annuity factors). In the real exam rounding will not be a problem because you would be asked (for example) to give an answer to the nearest $1,000.
(b) see the following post 🙂
https://opentuition.com/topic/mock-exam-question-9/can you explain why you added 20,000? (The average investment = (300,000 + 20,000) / 2 = 160,000)
I guess 20,000 is scrap value, and thus it’s included in 300,000 why are we adding it again?
I thought 300,000 should be divided by 2…. can you explain the concept of this calculation?
If it is 300,000 at the start and only 20,000 at the end , then on average it is (300,000 + 20,000)/2
The average would only be 300,000/2 if the value at the end was zero. Here the value at the end is higher and the average is therefore higher.
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