Page 48 - Microsoft Word - 00 ACCA F9 IWB prelims 2017.docx

Chapter 3

Question 6

Annuities

A project has the following information: Purchase of asset at the start of the
project $120,000. Sale of asset at the end of the project $25,000. Depreciation
per each year of the five year project $19,000. Contribution per annum
$40,000. Incremental fixed costs per annum $10,000.

Calculate the NPV of the project.

Method as used before:

Year $ Discount PV
factors 10%

0 (120,000) 1 (120,000)
1 30,000 0.909 27,270

2 30,000 0.826 24,780
3 30,000 0.751 22,530

4 30,000 0.683 20,490
5 55,000 0.621 34,155

NPV 9,225

Answer can be done more quickly using the annuity formula for the series of
cash flows of $30,000 in years 1 to 4:

Year $ Discount PV
factors 10%

0 (120,000) 1 (120,000)
1 – 4 30,000 3.170 95,100

5 55,000 0.621 34,155
NPV 9,255

NB: the only difference between the two answers is due to roundings.

40