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NPV,IRR AND PAYBACK PERIOD

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA MA – FIA FMA › NPV,IRR AND PAYBACK PERIOD

  • This topic has 1 reply, 2 voices, and was last updated 7 years ago by John Moffat.
Viewing 2 posts - 1 through 2 (of 2 total)
  • Author
    Posts
  • November 15, 2015 at 8:34 pm #282710
    mary94
    Member
    • Topics: 4
    • Replies: 2
    • ☆

    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 period

    How do I come up with an answer?

    November 16, 2015 at 7:24 am #282742
    John Moffat
    Keymaster
    • Topics: 56
    • Replies: 51583
    • ☆☆☆☆☆

    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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