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Hello sir .
I came cross a question about NPV in revision exam
Here is the question:
Able Ltd is considering a new project for which the following information is availableInitial cos-$300,000
Expected life-5 years
Estimated scrape value-$20,000
Additional revenue from the project-$120,000 per year
Incremental costs of the project-$30,000 per year
Cost of capital-10%
MY WORKING:
NPV=[ (90*(0.909+0.826+0.751+0.683)+110*0.621)-300 ]*1000=53,520BUT THE CORRECT ANSWER IS 53610
Would you like to explain it for me?
ThanksThe difference is simply due to rounding.
You have discounted each of the 90,000 per year flows separately.
It would have made more sense (because it is so much faster) to have multiplied by the annuity discount factor for 5 years at 10% (you are given the tables in the exam).
Because the discount tables only go to 3 decimal places, it creates differences in the rounding.
Because of this, in the real exam they would ask for the answer to the nearest thousand (and I will change the question in our exam to say that).
(With regard to annuities – if you are not sure then watch the free lectures. Our free lectures are a complete course for Paper F2 and cover everything you need to pass the exam well.)
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