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

Marlow Ltd expects to receive $50,000 in 3 years' time. The company's cost of capital is 10% per year. What is the present value of this receipt, to the nearest $?

The present value is $37,566. Discount the $50,000 by dividing by 1.10 cubed (1.331) because the cash arrives in three years at 10%. Discounting for only two years gives $41,322, and compounding forward gives $65,000; neither is correct.

  1. A$37,566Correct
  2. B$38,150
  3. C$41,322
  4. D$65,000

Explanation

PV = 50,000 / 1.10^3 = 50,000 / 1.331 = $37,566. The figure $41,322 comes from discounting for only 2 years. $65,000 compounds the amount forward instead of discounting it.

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