mock exam

Able ltd is considering a new project for which the following info is available: initial cost $300000 expected life 5yr estimated scrap value $20000 additional revenue from the project:$120000 p.a. incremental cost of the project$30000 p.a. cost of capital 10% (a)npv of the project? Ans:53610 (b)IRR? ans: 21% (c)payback period? ans:3.33yr

my answer was: (a) outflow=300000 1st 4 yr inflow=90000(120000-30000) 5th yr inflow=110000(90000+20000) which gives npv=53520 (b)first i select 15% as discount rate which gives a positive npv,then select 20% which gives npv=-22860. the IRR=17%..the answer is 21%.how i calculate discount rate heigher than 20%??annuity table provide value upto 20%.. is there are any technique to know which discount rate gives the smallest negative npv?? (c)4.21 yr please help!!!!

(a) The difference is due to rounding in the tables. (The answer has taken a 5 year annuity of 90,000 p.a., and the separately discounted 20,000 for 5 years). The rounding will not be a problem in the real exam (they will avoid the problem by, for example, asking for the answer to the nearest 1,000) (b) A few things. Firstly you can calculate the discount factors at any rate you want using the formulae given at the top of the discount tables (although you actually don't need to here). Secondly, as I explain in the free lecture, you do not need a negative NPV - you can calculate the IRR with two positive NPV's. Thirdly, and most importantly here, if you discount at 20% the NPV is still positive - it should then be obvious what the answer is from looking at the choices available. (c) Since the project is giving a net 90,000 a year, then after three years we have got 270,000. That means we need another 30,000 which will take 1/3 of the 4th year.

its clear now..thnak you very much sir..

You are welcome :-)