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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 20,000Additional revenue 120,000 per year and additional cost 30,000 per year. Cost of capital 10%
Thanks a lot
Gabbi
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.
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