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Hiya,
Please can ANYONE help me with the below question. I have no idea how to answer the below, and the study guide just shows the answer and no workings 🙁
Brackenwood Plc is a tree felling company that needs to replace a major item of capital equipment in 3 years time. The estimated replacement cost will be $500,000. Funds for the replacement are to be provided by setting aside 4 equal annual sums and investing them at 10% pa. The first amount will be invested immediately, the last in 3 years time.
What is the annual amount that Brackenwood should set aside?
The correct answer is – $107,686.
Please can someone help!
Thank you
The present value of the 500,000 and of the payments need to be the same.
To get the present value of the 500,000, just multiply it by the 3 year discount factor at 10%.
For the annual payments, there is one now – so if it is X each time, then the present value is 1 x X
There are then 3 years of X each time – the present value of these is X x (the 3 year annuity factor)
So….. The total present value is X x (1 + 3 year annuity factor)Make this equal to the present value of the 500,000 and you can then calculate X. 🙂
Let me know if it works for you.
Hi ,please can any help me to solve the below question.
able limited considers new project and these are the information given
Initial cost- &300,000
Expected life-5yrs
Estimated scrap value-&20,000
Additional revenue from the project-&120,000 per year.
Incremental cost of the project-$30,000. per year.
Cost of capital is 10%.
thanks.a) find the present value.
b)accounting rate of return of the project.
c)payback period.Since you asked in the Ask the Tutor Forum, “any” will always be me 🙂
NPV: There is a net cash inflow of 90,000 per annum for 5 years – use the 5 year annuity discount factor to discount. There is also an inflow of 20,000 in 5 years time – use the normal 5 year discount factor to discount.
ARR: the average profit per annum = 90,000 – depreciation. Depreciation = (300,000 – 20,000) / 5 = 56,000. So profit = 34,000.
Average investment = (300,000 + 20,000) / 2 = 160,000
ARR = 34,000 / 160,000 = 21%Payback period: After 3 years they have got back 3 x 90,000 = 270,000, so they need another 30,000. They get 90,000 in the 4th year, so 30,000 will take 30/90 = 0.33 of the 4th year. So total payback period = 3.33 years.
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