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Good day, Sir Moffat.
I have another question regarding the revision mock exam, the answers for these questions weren’t provided after the exam 🙁
Initial cost: $300,000
Expected life: 5 years
Estimate scrap value: $20,000
Addition revenue from project: $120,000 per year
Incremental costs from project: $30,000 per year
Cost of Capital: 10%a) calculate net present value of project
b) calculate the accounting rate of return
c) calculate the payback period for the projectAble Ltd is also considering another project and has calculated that the internal rate of return of this project is 13%.
(d) This other project will have a _____ Net Present Value at Able’s Cost of Capital.
Sorry to bother you Sir Moffat! A detailed response and explanation would be much appreciated. Thank you in advance, God bless 🙂
Have you watched my free lectures on Investment appraisal, because I will give you the answers, but explanations are in the lectures and I am not going to type out all my lectures here 🙂
(My lectures are a complete free course for Paper F2 and cover everything needed to be able to pass the exam well)a) ((120,000 – 30,000) x 3.791) + (20,000 x 0.621) – 300,000 = 53,610
b) Depreciation = (300,000 – 20,000)/5 = 56,000 p.a.
So average profit = 90,000 – 56,000 = 34,000 p.a.
Average investment = (300,000 + 20,000) / 2 = 160,000
So ARR = 34,000/160,000 = 21.25%
c) Payback period = 300,000 / 90,000 = 3.33 years (or 3 years 4 months)
d) the IRR is more than 10% so the NPV will be positive.
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