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Dear John,
I have tried the OpenTuition mock exam and I am struggling with the section B questions. There were only answers and no calculations that I could refer to.
Able Ltd is considering a new project for which the following info is available.
Initial cost – $300,000
Expected life – 5 years
Expected scrap value – $20,000
Addition revenue from the project – $120,000 per year
Incremental cost of the project – $30,000 per year
Cost of capital – 10%a) Calculate the net present value of the project
Ans given : $53,610This was what I did —
Year 0 (300,000)
Year 1 (27,270)
109,080
Year 2 (24,780)
99,120
Year 3 (22,530)
90,120
Year 4 (20,490)
81,960
Year 5 (18,630)
74,520
12,420 = 20,000 x 0.621
________
My ans : 53,520I basically calculated the NPV of the revenue for every year (which is 120,000 p.a.) and added them up, and then minus the NPV of the incremental cost of the project every year (30,000 p.a.). I am not so sure if I should add up the scrap value at the end of the project (I used the NPV as well).
Could you please help me with this?
Thank you 🙂
I really don’t think that you can have watched our free lectures before attempting the mock exam!
There is an net inflow of 90,000 a year (120,000 – 30,000) for 5 years.
To discount each of the years separately is wasting time – simply multiply by the 5 years annuity factor at 10%.In addition there is a cash inflow of 20,000 (the scrap) in 5 years time. You discount this using the normal discount factor for 5 years at 10%.
The net present value is the two figures calculated above less the initial cost of 300,000.
I really do suggest that you watch my free lectures. They are a complete free course for Paper F2 and cover everything needed to be able to pass the exam well.
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