- This topic has 1 reply, 2 voices, and was last updated 3 years ago by
.
- Posts
I just don’t know what to do in the calculator to get from 12 % to the value 4.111 (see question & answer below) :
This project has an initial cash outflow of $120,000; the project will generate six equal annual cash inflows, commencing in one year’s time. The payback period is exactly four years. The company’s cost of capital is 12% per year.
Q: What is the project’s B net present value?
A: A four-year payback period implies an (equal) annual cash flow of $120,000 ÷ 4 years = $30,000 per year. As these cash flows are for 6 years the NPV is $3,330 (–$120,000 + Annuity factor for 6 years @ 12% × $30,000 = –$120,000 + 4.111 × $30,000 = $3,330).
The correct answer is: $3,330Thanks a mill for your help! 😀
In future, if you want me to answer you must ask in the Ask the Tutor Forum. This forum is for students to help each other.
You do not need a calculator to get 4.111 because you are provided with tables in the exam.
The inflows for 6 years are an annuity and therefore the discount factor is the 6 year annuity factor at 12%, which from the tables is 4.111.
This is all explained in my free lectures on investment appraisal. The lectures are a complete free course for Paper MA and cover everything needed to be able to pass the exam well.
- You must be logged in to reply to this topic.