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New project cost $160,000. 4 years expected life and scrap value $20,000.
Net cash flows are as follows:
Yr1 $40,000
Yr2 $60,000
Yr 3 $80,000
Yr4 $20,000Cost of Capital is 10% p.a. What is the ARR of the investment?
Can you please help me on this one, I must be doing something wrong but I’m calculating is as: (Cashflow less depreciation)/ investment cost. Don’t know why I’m not getting 16.67%??
You need to use the avg initial capital ie (160000 + 20000)/2.
avg annual profits / avr initial investment 15000/90000= 16.67%
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What is the Net Present Value of the investment. Please guide me how to calculate.
You must watch the free lecture on investment appraisal – I cannot teach you all about discounting by typing out the lecture here.
(It might help you to also watch the Paper F2 lectures on investment appraisal, because it is very basic revision of Paper F2).
HI Skgoh5101,
I am not sure if you figured out the answer but this was baffling me as well .The scrap value is an additional inflow. I was netting the €20,000 off each other in year 4 when the total cash inflow should be €40000
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