MA Mock Test - Section B - Question 1 issues

CCClayton Camilleri6y ago

Hi I cannot figure out this question. I am getting an NPV of the project of 53,590 while the results show 53,610. Can you please help me understand this difference. And I would also appreciate help on the following question regarding the Accounting Rate of Return. Thanks in advance.

CCClayton Camilleri6y ago#1

I figured out the difference in the NPV. I was using a 4 decimal places rates, hence the difference. But I still cannot understand how the ARR is 21 %. Can someone please explain to me. I have my exam in 2 days. Thanks

John MoffatTutor6y ago#2

Don't worry about the rounding difference in the NPV - rounding differences do not lose marks in the exam. As far as the ARR is concerned, net cash flow each year is 120,000 - 30,000 = 90,000. For the ARR we need the accounting profit, so we need to subtract depreciation. The depreciation per year is (300,000 - 20,000) / 5 = 56,000. Therefore the profit per year is 90,000 - 56,000 = 34,000. The average value of the asset over the period is (300,000 + 20,000) / 2 = 160,000. Therefore the ARR = 34,000/160,000 = 21.25%

CCClayton Camilleri6y ago#3

Thanks so much Mr Moffat. Now I understand. Best regards,

John MoffatTutor6y ago#4

You are welcome :-)

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