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variance analysis

This topic has 1 reply, 2 voices, and was last updated 9 years ago by John Moffat.

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February 20, 2015 at 3:40 pm #229331
amna
Participant
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I am extremely sorry for asking the answer alone.I am doing my exams tomorrow and i found the below questions in the open tuition revision exam.I tried my best to find an answer but i couldnt figure it out.Thats why i asked you sir to get help.
Can i know what is incremental cost and how is the scrap value accounted?
Initial cost $300,000
Expected life 5 years
Est. 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%
calculate the NPV of the
project.
February 21, 2015 at 7:22 am #229454
John Moffat
Keymaster
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Incremental is another word for extra.
So the net cash inflow each year is 120,000 (extra revenue) less 30,000 (extra costs). i.e. 90,000 a year for each of the 5 years. (And, of course, an extra 20,000 in 5 years time from scrap.)
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