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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
Addition revenue from the project- $120,000 per year
Incremental costs of the project- $30,000 per year
Cost of capital- 10%a) Calculate the NPV of the project
b)Calculate the Accounting rate of return of the project to the nearest %Why are you setting me a test question?!!
You should use this forum to ask about whatever it is you are not clear about – not simply to ask for a full answer!!
The net cash flow is 90,000 a year (120,000 – 30,000) for 5 years. So you discount the 90,000 using the annuity discount factor for 5 years at 10%.
In addition there is the scrap value of 20,000 in 5 years time. You discount this using the ordinary present value factor for 5 years at 10%.For the net present value you add the two present values above and subtract the initial investment of 300,000.
Did you watch the free lectures on investment appraisal before attempting this question? There is obviously no point in attempting questions before you have studied the topic 🙂
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