- December 16, 2019 at 10:26 am #556020
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.
- December 16, 2019 at 1:05 pm #556053
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.
- December 16, 2019 at 3:18 pm #556064John MoffatKeymaster
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%
- December 16, 2019 at 3:24 pm #556066
Thanks so much Mr Moffat. Now I understand.
- December 17, 2019 at 7:25 am #556092John MoffatKeymaster
You are welcome 🙂
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