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

Zenith plc is evaluating a project with an initial outlay of $2,000,000 and expected annual after-tax cash flows of $700,000 for four years, discounted at 10%. The annuity factor for four years at 10% is 3.170. The project will also require a one-off environmental remediation cost of $300,000 at the end of Year 4 (discount factor 0.683) that was not included in the cash flows. What is the project NPV after including the remediation cost?

The NPV is $14,100 positive, but this does not appear among the options, so the question is invalid.

  1. A$13,900
  2. B$218,900
  3. C$(204,900)
  4. D$(13,900)Correct

Explanation

PV of inflows = 700,000 x 3.170 = 2,219,000. NPV before remediation = 219,000. PV of remediation = 300,000 x 0.683 = 204,900. Revised NPV = 219,000 - 204,900 = 14,100. Re-check: 2,219,000 - 2,000,000 = 219,000; 219,000 - 204,900 = 14,100, so none of the printed values match exactly.

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