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Good Day Sir
In relation to the following question:
initial cost – $300,000
expected life – 5 years
Estimated scrap value – $20,000
Addition revenue from the project – $120,000 per year
Incremental costs of the project – $30,000 per year
cost of capital – 10%
My value for the NPV=53,610
My value for ARR/IRR(am hoping that this is the same thing) using my chosen rate of 12%=35,790
So then:
0.10=53610
0.12=35,790Giving me an ARR of 11.875
Is this correct?
BTW thank you for your lecture on teaching me this easier method as I was using the formula before 🙂
Your NPV is correct.
ARR and IRR are not the same thing – you need to watch the relevant lectures.
The ARR is the accounting rate of return whereas the IRR is the internal rate of return.
The question asks for the ARR and is 21%.(Even if it had asked for the IRR, your answer would be wrong. If the NPV is positive at 12%, then the IRR (for an NPV of zero) must be more than 12%)
PS At the end of the mock exam you have the opportunity to check your answers to see what the correct answers are.
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