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Hi can someone help me with question plzzzz. Initial cost $300000, expected life 5yrs. Estimate scrap value is $20000. Addition revenue from project $30000 per year. Cost of capital 10%. A. Calculate NPV of the project. B. Calculate interest rate’, calculate the payback. Plz lz someone help me. This question is in section B of the mock exam
Have you actually watched the free lectures on Investment Appraisal??
Firstly, you have typed the question wrongly. There is additional revenue of 120,000 a year and extra costs of 30,000 a year – so the net cash inflow is 90,000 per year.
For part A, you discount the scrap value using the ordinary 5 year discount factor at 10%, and discount the net cash inflow using the annuity discount factor for 5 years at 10%.
For part B, you are not asked to calculate the interest rate at all – that would be silly. You are asked for the Accounting rate of return. This is the average annual profit expressed as a percentage of the average value of the investment.
For part C, the payback period is the number of years it takes, in cash terms, to get back the initial investment of 300,000.
You really should watch the lecture and you should then find the question easy.
Thank u appreciate the explanation.
You are welcome 🙂