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John Moffat.
John Moffat.-
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smritigoyal
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Good Day Sir!
I have attempted the Revision Mock Exam and am not able to calculate the NPV correctly in Section B Question 1 (a) of the exam.
I calculated using the amount $90000 ($120000-$30000) each year at 10% discounting factor for 5 years and $20000 scrap value at 10% discounting factor in the 5th year and got the answer $53520 NPV (which after the results I found to be wrong) and it is showing the right answer to be $53610 NPV. Please explain the correct method of solving the above question.And also please tell me how to calculate ARR in the same question (b).
Thank you
John Moffat
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For 1(a) it looks like the difference is purely a rounding difference (did you use the discount tables given, or calculate the factors yourself?). This will not be a problem in the exam because to avoid rounding problems, questions ask for the answer to (for example) the nearest thousand.
For question 1(b) see the following link
:https://opentuition.com/topic/mock-exam-section-b/smritigoyal
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I used the given discounting tables only but I calculated the PV separately for each year.
Now I understand both parts but I still have one doubt in 1(a) why was annuity table used instead of present value table.
Thank you
John Moffat
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It is quicker to use the annuity factor because it is an equal cash flow each year.
It doesn’t matter if you discount each year separately (it gives a rounding difference but that doesn’t matter in the exam), but it does take longer and one of the biggest problems in the exam is the time pressure.
smritigoyal
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