Mock exam Section B

I assume that you have watched all of our free lectures before attempting the exam?

Part (a):

Outflow at time 0: (300,000)
Net inflow of 90,000 per year (120,000 – 30,000) for 5 years, so multiply 90,000 by the 5 year annuity discount factor at 10%.
Inflow at time 5 of 20,000, so multiply 20,000 by the present value factor for 5 years at 10%.

Part (b):

Net cash flow = 90,000 p.a.
Depreciation = (300,000 – 20,000)/5 = 56,000
So, average annual profit = 90,000 – 56,000 = 34,000.
Average investment = (300,000 + 20,000) / 2 = 160,000.
Therefore ARR = 34,000/160,000 = 21.25%

Part (c)

Net cash receipt = 90,000 per year.
Therefore time taken to get back 300,000 = 300,000/90,000 = 3.33 years

Part (d)

If you have watched the lectures then I am surprised you need an answer given for this question!
The IRR of 13% is more that the cost of capital of 10%, and therefore the project will have a positive NPV.

It is easier and quicker to use the annuity factor. However it is OK to discount the flows individually – the answer will be a little different because the tables are rounded to three decimal places. This is dealt with in the exam because questions will ask for it to the nearest thousand in these cases.

(I assume that you have watched the lectures? They are a complete free course for Paper F2 and cover everything needed to be able to pass the exam well.)

You are welcome 🙂