Skip to content

ACCA Applied Knowledge · Management Accounting · Asset budgeting and investment appraisal

A project costs $50,000 and produces net cash inflows of $15,000 at the end of each of four years. The cost of capital is 12% and the four-year annuity factor is 3.037. Which statement is correct?

The project never recovers its outlay on a discounted basis within four years. Inflows have a present value of $15,000 x 3.037 = $45,555, below the $50,000 cost, so NPV is about -$4,445. The 3.3-year figure and +$10,000 come from ignoring discounting.

  1. AThe discounted payback is 3.3 years and the NPV is positive
  2. BThe project does not pay back on a discounted basis within its four-year life and the NPV is about -$4,445Correct
  3. CThe discounted payback is exactly 4 years and the NPV is zero
  4. DThe NPV is +$10,000 because total inflows exceed the outlay

Explanation

PV of inflows is $15,000 x 3.037 = $45,555, which is below the $50,000 outlay. NPV is therefore -$4,445 and the outlay is never recovered on a discounted basis within four years. The 3.3-year figure is the simple payback ($50,000/$15,000), and +$10,000 ignores discounting.

Did you get it right without looking?

One question tells you little. A timed set on Asset budgeting and investment appraisal shows your real accuracy, how long you take and where you lose marks.

Practise Asset budgeting and investment appraisalFree diagnostic mock

More Asset budgeting and investment appraisal questions