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Dear Anonymous,
Topic Question (heading) :
Able Ltd is mulling over a new project for which the following information is provided.Initial cost — $300,000 (300 grand)
Expected life — 5 years
Estimated scrap value — $20,000 (20 grand)
Additional revenue from project per year — $120,000
Incremental cost of project (yearly) — $30,000
Cost of capital — 10 %This is my working for Net Present Value :
NPV (Yr 1 – Yr 5) ==~ 90000 ((1-(1+0.1)^(-5)) / 0.1) =~ 341,170.81
Scrap (Yr 5) — 20000 / (1.1) ^ 5 =~ 12,418.43
Profit covering of initial investment ~= 353,589.24
(sub-total)NPV = 353,589.24 – 300,000
= 53,589.24 (but the answer is 53,610) Can you please explain why ?The difference is simply because you have discounted using the formula whereas the answer of 53,610 has used the discount tables that are given to you in the examination.
The discount factors in the tables are rounded to 3 decimal places which is what will always result in a difference.
You can do it either way, and because of this difference questions in the exam will always ask for answers to the nearest $100 or nearest $1,000.This is explained in our free lecture. I do suggest that you watch our free lectures – they are a complete course for Paper F2 and cover everything needed to be able to pass the exam well.
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