Question 1

A project requires an initial investment of $100,000. It will generate cash inflows of $40,000 per year for 3 years. The company's cost of capital is 10%. 
The discount factors at 10% are: Year 1 = 0.909, Year 2 = 0.826, Year 3 = 0.751.

What is the Net Present Value (NPV) of the project?

Accepted Answer

Multiply each year's cash flow by its discount factor to find the Present Value (PV). Sum the PVs of the inflows and subtract the initial investment.

Question 2

What mistakes do candidates make on this ACCA question?

Accepted Answer

Forgetting to subtract the initial investment.

A project requires an initial investment of $100,000. It will generate cash inflows of $40,000 per year for 3 years. The company's cost of capital is 10%.
The discount factors at 10% are: Year 1 = 0.909, Year 2 = 0.826, Year 3 = 0.751.

What is the Net Present Value (NPV) of the project?

How to approach this question

Full Answer

Common mistakes

Practice the full ACCA MA — Management Accounting Practice Exam 2

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