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Initial cost – $300,000
Expected Life – 5 yrs
estimated scrap value – $20,000
Additional revenue from the project – $120,000 p.a.
Incremental costs of the project – $30,000 p.a.
Cost of capital – 10%Calculate the NPV
The correct answer is 53,610
What I did was i subtracted the costs from the revenue, then multiplying it to the discount factors to get the value for each year (I included the scrap value to the 5th year) i got the ff:
Yr. 1 = 81 810
Yr. 2 = 74 340
Yr. 3 = 67 590
Yr. 4 = 61 470
Yr. 5 = 68 310I got a total of 353 520, which if you subtract from the initial cost, is only 53 520.
Is there something wrong with how I did it? If so, what is the correct solution??
The difference is due to rounding – the discount factors in the tables are rounded to 3 decimal places.
The answer of 53,610 is arrived at if you take the net 90,000 per year and use the 5 year annuity factor to calculate the PV (and then discount the scrap proceeds separately). Although this is faster than discounting each year separately, you would still get full marks doing what you have done.
okay okay
For the scrap value, I multiply it with the 5th yr PV factor since it was valued on the 5th year right?
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