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Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA MA – FIA FMA › NPV calculation
A company is evaluating a new product proposal that will last 6 years.
The initial outlay is $2 million. The proposed product selling price is $220 per unit and the variable costs are $55 per unit and sales are planned to be 2,750 units each year. The incremental cash fixed costs for the product will be $3,750 per annum.
What is the NPV of this project is the cost of capital is 10%.
A $40,250
B -$40,250
C $190,600
D -$190,600
How do I calculate the annual cash flow? I’m stuck with the ‘Fixed Costs’ part. Should it be included in the annual cash flow or excluded from it.
They are incremental (i.e. extra) cash outlows, and so should be included in calculating the annual cash flow.
So the net cash inflow each year is (2,750 x (220 – 55)) – 3,750 = $45,000.