ACCA Applied Skills · Financial Management · Investment appraisal techniques
An asset costs $30,000 and gives equal annual net cash inflows for 5 years, with a cost of capital of 10% (5-year annuity factor 3.791). What is the minimum constant annual inflow needed for the project to have a zero NPV, to the nearest $?
The minimum annual inflow is $7,913. For a zero NPV, the present value of the inflows must equal the $30,000 outlay, so divide $30,000 by the 5-year annuity factor of 3.791.
- A$6,000
- B$7,913Correct
- C$8,500
- D$3,791
Explanation
Required annual inflow = 30,000 / 3.791 = 7,913. Dividing by 5 gives 6,000, which ignores the time value of money. Multiplying 30,000 by 3.791 wrongly inverts the relationship.
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