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Hi,
I did today the mock exam on this site and I have a question about the Question 1 a – Section B.
I have inintial cost of 300,000 $, expected life 5 years, scrap value of 20,000$, incremental costs of 30,000 each year, addition revenue – 120,000 $ each year and cost of capital of 10%. What is the NPV?I considered the cachflow for Year 1 – Year 4 – 90,000 (120,000 – 30,000) $ and for the Year 5 – 110,000 (20,000 + 120,000 – 30,000). I applied the dicount factor for every year and the NPV obtained was 53520 $.
The correct answer given is 53,610 $. I don’t know where I did a mistake. please help.
Thank you,
I would imagine that the difference is solely due to the rounding in the discount tables. In the real exam this would not lose you marks (you would be asked for the answer to the nearest thousand).
The 53610 is arrived at by discounting 90,000 a year for 5 years (using the 5 year annuity factor) and the 20,000 for 5 years using the normal 5 year factor.
What you have done is fine, but again, because of rounding, it will result in a slightly different answer.
I am a little bit relaxed now that I know I didn’t do mistakes in my solution. Thank you
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