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Hi, Sir not to sure how to handle the NPV questions that has issues like these.
A project has been evaluated on the basis that it will cost $14m and will have a NPV of $2.3m. The project has commenced and $3 million out of the $14 million has been invested. A problem has happened and it will cost $2.5 million. What is the NPV of continuing with this project.
Thanks
I do not know where you found this question, but there must be an answer in the same book, and you should use this forum to ask about whatever it is in the answer that you do not understand!!
Given that you know the cost of $14M and the NPV of $2.3M then you know the present value of the returns.
If the continue, they will spend another $11M and they will spend $2.5M to correct the problem – so a total of $13.5M. You know what the present value of the returns is, so now you can calculate the NPV.
Hi Sir. The question is from an ACORN workbook and the answer is $2.8m but there is no working. This is why I posted the question on the forum for some help.
From what you have helped me with I can see that the PV of the returns before the issues is -$14m+pv=$2.3m. Therefore PV should be $16.3m
I can see if I deduct 16.3m from the new PV of $13.5 I get $2.8m but I am not clear on why I needed to take the difference in PV. Why dont we add this difference to the original NPV?
thanks
I don’t know what ACORN is, but you should be using a Revision Kit from one of the ACCA approved publishers. They are allowed to use past exam exam questions (nobody else is) and they have answers and workings.
They have already invested $3M and so this is now a sunk cost. If they choose to continue they will have to invest another $11M and in addition $2.5M because of the problem. So there will now be an investment of $13.5M in order to get a PV of $16.3M, and so the new NPV will be $2.8M and so that is the new NPV if they decide to continue.
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