Question 36 Mock Exam NPV — OpenTuition Forums

GGabbi11y ago

Dear Mr Moffat Question 36 gave me some difficulties as well. Am I right if I say that the interest and cost shouldn 't be considered when calculating the NPV. Only the scrap value should be taken into consideration. If so, ops I could not get the same result. Could you please help? Initial cost $300,000 Expected life 5 years Estimate scrap 20,000 Additional revenue 120,000 per year and additional cost 30,000 per year. Cost of capital 10% Thanks a lot Gabbi

John MoffatTutor11y ago#1

Interest is accounting for by the discounting - that is why we discount. In this question, the initial outflow is 300,000. The net inflow each year is 120,000 - 30,000 = 90000. Because it is an equal amount each year, you discount using the 5 year annuity factor at 10%. There is then the scrap inflow of 20,000 at the end of 5 years. You discount this using the normal discount factor for 5 years at 10%. The net present value is the net of these three present values.

GGabbi11y ago#2

Thank you very much Gabbi

John MoffatTutor11y ago#3

You are welcome :-)