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Able ltd is considering a new project for which the following information is available:
Initial cost-300000
Expected life-5yrs
Estimated scrap-20000
Addition revenue from -120000 per year
Incremental costs of the project-$300000 per year
Cost of capital-10%Calculate the net present value
Accounting rate of return
Payback periodHow do I come up with an answer?
You must watch the free lectures on investment appraisal to see how to calculate NPV, ARR, and payback period – I cannot type out the entire lectures here.
For NPV and payback, the cash flows are:
0 (300,000)
1 – 5 90,000 per year (120,000 – 30,000) (The incremental costs are 30,000,not 300,000)
5 20,000 (scrap)For ARR, the average profit per year = 120,000 – 30,000 – ((300,000 – 20,000)/5) (the depreciation), and the average capital employed = (300,000 + 20,000) / 2
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