ACCA Applied Knowledge · Management Accounting · Asset budgeting and investment appraisal
A project requires an initial outlay of $40,000 now and generates net cash inflows of $15,000 at the end of each year for 4 years. The cost of capital is 8%. The 4-year annuity factor at 8% is 3.312. What is the net present value?
The NPV is a positive $9,680. Inflows of $15,000 for four years at 8% have a present value of $49,680 (15,000 x 3.312), and deducting the $40,000 initial outlay leaves $9,680. The undiscounted surplus of $20,000 ignores the time value of money.
- A$9,680Correct
- B$20,000
- C$40,000
- D$(9,680)
Explanation
PV of inflows = 15,000 x 3.312 = $49,680. NPV = 49,680 - 40,000 = $9,680. The $20,000 figure is the undiscounted surplus (60,000 - 40,000). The negative figure reverses the sign.
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