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Able Ltd is considering a new project, for with the following information is available:
Initial cost – $300,000
Expected life – 5years
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%Calculate the Net Present Value of the project (to the nearest $)
Dear Sir,
Good day to you.
Please help to explain above question.
Thank you very much.
Ngu Wah
(If you want me to answer, then in future post in the F2 Ask the Tutor Forum).
The cash flows are:
0 Initial cost (300,000)
1 to 5 Net inflow of 90,000 per year (120,000 – 30,000)
5 Scrap 20,000The 90,000 for 5 years is discounted using the annuity discount factor for 5 years at 10%
The 20,000 scrap is discounted using the ordinary discount factor for 5 years at 10%(It might help you to watch my free lecture on investment appraisal)
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