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In the OpenTuition MA mock exam:
Able Ltd is considering a new project, details below:
Initial cost: $300,000
Expected life: 5 years
Estimate scrap value: $20,000
Addition revenue from project: $120,000 per year
Incremental costs from project: $30,000 per year
Cost of Capital: 10%a) calculate net present value of project
I calculate the NPV as $53,589. The mock marked this answer as wrong, though it is obviously a rounding error due to the rounded discount rates in the tables.
Would I be similarly penalized in the real exam?
No, it would not be marked wrong in the exam (because you calculate the answer in 3 different ways – using your calculator instead of tables, using the annuity factors from the tables, and discounting each year separately using tables – and each way gives a slightly different answer because of roundings.
In the real exam, questions get round this problem by asking for an answer rounded to the nearest $100 or to the nearest $1,000 (or for some questions program the computer to mark a range of answers as correct).
That’s good to know.
Thank you for the advice and your ongoing work at OpenTuition 🙂
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