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Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA MA – FIA FMA › NPV calculation

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- December 13, 2022 at 9:47 pm #674461
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 -$190,600How 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.

December 14, 2022 at 11:41 am #674544They 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.

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