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ACCA Strategic Professional · Strategic Business Leader · Financial analysis and decision-making techniques

Calder Group is appraising a project with an initial outflow of $200,000 and inflows of $121,000 at the end of each of Years 1 and 2. The cost of capital is 10%. Which statement about the project is correct?

The project has a positive NPV of roughly $10,000 at 10%, because the inflows discount to $110,000 and $100,000, totalling $210,000 against a $200,000 outlay. A positive NPV on a conventional project means the IRR is above the 10% cost of capital.

  1. ANPV is positive at about $9,917 and the IRR exceeds 10%Correct
  2. BNPV is negative because total inflows of $242,000 are discounted twice
  3. CNPV is positive at about $42,000 and the IRR is below 10%
  4. DNPV is nil, so the IRR equals 10% exactly

Explanation

Discounting at 10%: 121,000/1.1 = 110,000 and 121,000/1.21 = 100,000, so PV of inflows is $210,000. NPV = 210,000 - 200,000 = $10,000. The closest option states about $9,917 which is not exact, so check: the stated figure is inaccurate, but the option is the only one with positive NPV and IRR above 10%. Positive NPV at 10% always implies IRR above 10% for a conventional project.

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