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Able Ltd is considering a new project for which the following information is available:
Initial cost- $300,000
expected life-5 years
estimated scrap value-$20,000
additional revenue from the project $120,000 per yer
incremental costs of the project-$30,000 per year
cost of capital- 10%how do you calculate :
-the payback period? [$300,000 -$20,000/5 years =56000/365=153,4]
-accounting rate of return of the project
-net present valueYou MUST watch the lectures because what you have done makes no sense at all.
The net cash inflow is 90,000 per year.
To get back 300,000 takes 300,000/90,000 = 3.33 years (or 3 years 4 months)
ok thank you, i didn’t know how to calculate the payback period pardon my wrong calculation but i will watch the lecture on it.
Net cash inflow is derived at subtracting incremental costs of the project-$30,000 per year from additional revenue from the project $120,000 per yer?
hi i want to know when do we add or when do we subtract depreciation from the cash flows before calculating net present value or payback, because i saw in some examples the add depreciation and in some they subtract.
You cannot have seen in some examples they subtract depreciation – not for NPV or payback.
For both of these, we use the cash flows. If you are given the cash flows then you use them. If, instead, you are given the profits then you need to add back the depreciation because depreciation is not a cash flow.
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