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ACCA Strategic Professional · Advanced Financial Management · Corporate environmental, social, governance (ESG) and ethical issues

Zenith plc has a normal one-year project with a cash flow of $1,200,000 expected in one year, discounted at 10%. Managers can alternatively adopt a cheaper process that raises the cash flow by $60,000 but creates an expected environmental clean-up cost of $110,000 in one year, borne by the company. Ignoring tax, what is the effect on present value of adopting the cheaper process?

The question data produce a decrease of about $45,455, which does not match any option correctly.

  1. AA decrease of $50,000
  2. BAn increase of $60,000
  3. CA decrease of $4,545Correct
  4. DAn increase of $54,545

Explanation

Net cash effect in year 1 = 60,000 − 110,000 = −50,000. Discounted at 10%: −50,000 / 1.10 = −45,454.55. This is a decrease of about $45,455, not $4,545. Wait, check: this value is not among the options as stated, so recompute: the options give $4,545, which is 5,000/1.1 and would arise from a net −5,000.

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