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Able Ltd is considering a new project for which the following information is available:
Initial cost
H
H
$300,000
Expected life – 5 years
Estimated scrap value – $20,000
Addition revenue from the project – $120,000 per year
Incremental costs of the project – $30,000 per year
Cost of capital – 10%.Can you explain how to find the net present value
for this question in the mock exam ..the correct answer is $53610 ..but i am getting $53520 .There is no explanation on how to arrive at the correct answer in the mock exam
The difference is very small and will be due to the fact that you will have discounted each year separately whereas it is a little quicker to use the annuity factors (and because the factors in the tables are all rounded to three decimal places it results in slightly different answers).
It will not be a problem in the exam because either the computer will be programmed to accept a range of answers, or (more likely) it will ask for an answer to the nearest $thousand 🙂
oh okay i understand a bit more now , i suppose i am still confused in understanding how to use the annuity factors because i did indeed discount every year … but now that you explained i figured out how the “53610′ answer was arrived at . thank you kindly.
also how do you calculate the ARR-accounting rate of return is this different from the Internal Rate of return?
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