ACCA Applied Skills · Financial Management · Investment appraisal techniques
A project requires an initial outlay of $50,000 now and will generate net cash inflows of $14,000 at the end of each year for 5 years. The cost of capital is 10%. The 5-year annuity factor at 10% is 3.791. What is the net present value of the project?
The NPV is $3,074 positive. The annual inflows of $14,000 are multiplied by the 5-year annuity factor of 3.791 to give a present value of $53,074, and subtracting the $50,000 initial outlay leaves $3,074.
- A$3,074Correct
- B$20,000
- C$53,074
- D$(3,074)
Explanation
PV of inflows = 14,000 x 3.791 = 53,074. NPV = 53,074 - 50,000 = 3,074. Option $53,074 ignores the initial outlay; $20,000 is undiscounted (70,000 - 50,000).
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