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Hello Sir,
Spotty Ltd plans to purchase a machine costing $18,000 to save labour costs. Labour
savings would be $9,000 in the first year and labour rates in the second year will increase
by 10%. The estimated average annual rate of inflation is 8% and the company’s real cost of
capital is estimated at 12%. The machine has a two year life with an estimated actual
salvage value of £5,000 receivable at the end of year 2. All cash flows occur at the year end.
What is the negative NPV (to the nearest $10) of the proposed investment?The discounting rate is 20.96% then how can we calculate NPV since we have tables for just 20% ?
Given that the question implies that all flows are inflating at the average of 8%, then you just need to discount the current price flows (ignoring inflation) at the real cost of capital of 12%. (Does the printed answer to this question not make that clear?)
If you ever did have to discount a rate that is not in the tables (which is unlikely in the exam) then you would need to calculate the discount factor yourself using the formula provided. And, of course, if it were a Section C question then you have the NPV function in the spreadsheet and so do not need tables anyway.
Yeah this is a 2 marks question in Kaplan book.
I get the part you are saying that formula is there in excel but what if it comes in 2 marks question ? how can I discount it then?As I wrote before, you do not need to discount at 20.96% for this question, and even if you did need to (which is extremely unlikely in the exam) you would have to calculate the discount factor yourself using the formula provided at the top of the tables.
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