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

Tarn Co is evaluating a project with an outlay of $100,000 now and a single inflow of $133,100 at the end of year 3. At a 5% cost of capital, the NPV is positive. Using a rate of 10% the NPV is exactly zero. At a cost of capital of 12%, which statement is correct (discount factor at 12% for year 3 is 0.712)?

At 12% the NPV is about negative $5,230, so the project should be rejected. The $133,100 inflow discounted at 0.712 is worth about $94,770, below the $100,000 outlay. This is consistent with the IRR of 10% being lower than the 12% cost of capital.

  1. ANPV is negative at about $(5,230) and the project should be rejectedCorrect
  2. BNPV is positive at about $5,230 and the project should be accepted
  3. CNPV is zero because the IRR is 10%
  4. DNPV is negative at about $(33,100) and the project should be rejected

Explanation

PV of inflow at 12% = 133,100 x 0.712 = $94,767 (rounded). NPV = 94,767 - 100,000 = $(5,233), approximately $(5,230). The IRR of 10% is below 12%, so the project is rejected. Option $(33,100) ignores discounting.

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