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Investment Appraisal

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA MA – FIA FMA › Investment Appraisal

  • This topic has 1 reply, 2 voices, and was last updated 5 years ago by John Moffat.
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  • Author
    Posts
  • August 18, 2020 at 10:53 am #581020
    darshini01
    Member
    • Topics: 1
    • Replies: 0
    • ☆

    Related question :

    HMF Co is evaluating a project which requires investment of $5000 now and $2000 at the end of Year 1. The cash flow will be $7000 at the end of Year 2 and $6000 at the end of Year 3. Calculate the NPV to the nearest $. The cost of capital is 16%.

    ACTUAL QUESTION :
    I have the answer sheet of the question but unable to understand why the year 1 cash flow figure is treated as a negativ figure (see below)

    Answer according to answer sheet:

    Yr cashflow Disc. fact. Present value
    $ $
    0 (5000) 1.000 (5000)
    1 (2000) 0.862 (1724)
    2 7000 0.743 5201
    3 6000 0.641 3846

    Resulting NPV to $ 2323

    I’ll be grateful if my query is solved. Thank you.

    August 18, 2020 at 4:34 pm #581072
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54835
    • ☆☆☆☆☆

    The question says that the project requires and investment of $5,000 now (so time 0) and $2,000 at the end of year 1 (so time 1).

    Since these are both investments of money, they are outflows of cash and so are shown as negative.

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