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

A project costs $50,000 now and returns $30,000 at the end of year 1 and $30,000 at the end of year 2. The cost of capital is 10%. Discount factors at 10% are 0.909 for year 1 and 0.826 for year 2. What is the net present value?

The NPV is $2,050. Discounting the two $30,000 inflows at 10% gives $27,270 and $24,780, a total present value of $52,050. Deducting the $50,000 initial outlay leaves a positive net present value of $2,050.

  1. A$10,000
  2. B$5,050Correct
  3. C$2,050
  4. D$7,050

Explanation

PV of inflows = 30,000 x 0.909 + 30,000 x 0.826 = 27,270 + 24,780 = 52,050. NPV = 52,050 - 50,000 = $2,050. Wait: this equals $2,050, so the correct option is $2,050, not $5,050.

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