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Capital budgeting: NPV of Project

calculate the NPV of the project and suggest whether it should be undertaken.

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A company is considering an investment in an item of equipment costing $ 24000. The equipment would attract a 25 % annual writing down allowance. The operating cash flows are forecast as:

                                   

Year 1                         9000

Year 2                         12000

Year 3                         6000

The estimates do not allow for the investment of $ 7500 in working capital that would be required. The project is expected to have a three-year life, at the end of which the equipment would have a sell-off value of $ 15000 at the end of year 3. The rate of tax on profits 30%. The company’s cost of capital is 8%. PV Factors for 3 years = 0.909, 0.826, 0.751

calculate the NPV of the project and suggest whether it should be
undertaken.

Replies (14)

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By David Ex
07th Nov 2021 11:25

Well 0 out of 10 for effort. You’ve cut and pasted your homework question.

If you can’t even be bothered to show your workings and proposed answer then, to be honest, I’d consider whether you’ve chosen the right profession.

You don’t even give a clue as to what you expect from people responding. Is there one particular issue that you are struggling with?

Thanks (2)
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By D V Fields
07th Nov 2021 11:44

Is there a reason why you cannot do the calculations yourself?

Contributors are more than happy to help when you are prepared to make an effort yourself.

Budgets or forecasts? Remember they are not the same thing.

Dave

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By Leywood
07th Nov 2021 12:35

James is clearly not an Accountant yet!

Apart from forgetting to attempt it yourself, you didnt bother to say please.

Thanks (3)
Stepurhan
By stepurhan
07th Nov 2021 13:04

42.

Also this is a forum for real-world accountancy problems. Not students that cannot be bothered to do their homework.

If you are having problems with a particular aspect you MIGHT get some help if you say so. You have really got off on the wrong foot though so I would not guarantee that.

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Replying to stepurhan:
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By Hugo Fair
07th Nov 2021 13:38

Not sure that the hhgttg reference will make sense in Wisconsin or Minnesota or wherever OP resides.
Oh and in terms of his second question ... Yes AND No, if you're using a quantum computer to perform the calcs.

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Replying to Hugo Fair:
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By Paul Crowley
07th Nov 2021 15:47

Brain the size of a planet
@OP google the above

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Replying to stepurhan:
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By Tax Dragon
07th Nov 2021 16:29

stepurhan wrote:

Also this is a forum for real-world accountancy problems.

The interplay between the specific and the general was played out with clarity in a recent thread about a gift to a company. The individual making the gift had effected it by varying a Will. That sounds like a really bad idea for most people (ie in general), but it might be something you'd consider in particular circumstances.

It's alright us talking in general terms, and using a specific case to trigger a generic conversation. What tends to happen though is that the OP (or indeed another reader) might impute the general conclusions back to the (or another) specific case, for which those conclusions may be inappropriate.

Put simply, relying on the forum for "advice" is, generally (:-)), stupid.

Thanks (1)
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By Paul Crowley
07th Nov 2021 15:42

Dollars is the issue
This is a UK site
UK answers could be unhelpful

If you want help with homework then show what you would consider the answer to be and people will help
Your posting appears to be that you cannot be bothered even to try
as such giving the answer is no help
you need to understand how to to it and that will be in your study pack

Responders WILL help to point out where you got it wrong and explain the error
BUT they will not do your homework

And if you are a student then best change the ID
James the student would have received more sympathetic response
PLEASE also do not try to respond to other OPs
you will get it wrong and OPs may even believe you to their detriment

Thanks (3)
Replying to Paul Crowley:
Routemaster image
By tom123
07th Nov 2021 17:40

I think exam papers now tend to use $, or a generic thing instead, so that they are 'international'..

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Replying to tom123:
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By Paul Crowley
07th Nov 2021 22:16

Yes I agree, ACCA is international
ICAEW is not
But tax being added in is a problem
Capital allowances can vary according to country
Hence my UK comment

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Routemaster image
By tom123
07th Nov 2021 17:39

Well, I think the NPV is $7183 which is below the target of $7560, so the investment should not go ahead.

Should I rip up my CIMA certificate now?

Oh, and I have done one NPV calculation in 20 years of real life..
Year Capital Working Cash Flow Tax (=cash flow less 8000 * .3) Post Tax Net Discounted
0 24000 7500 31500 1 31500 2520
1 9000 300 8700 -8700 0.909 -7908.3
2 12000 1200 10800 -10800 0.826 -8920.8 7560
3 -15000 -7500 6000 -600 6600 -29100 0.751 -21854.1

-7183.2 NO

There really ought to be a better way to get figures in to replies..

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Replying to tom123:
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By Tax Dragon
07th Nov 2021 19:22

I reckon if they
a) registered for VAT
b) pushed all the tax into year 3 by making better use of the reliefs available
it could rescue the project.

Perhaps they should spend $500 on tailored tax and accounting advice up front. This generalised textbook nonsense is good for... well, good for students, to be fair.

Thanks (1)
Replying to Tax Dragon:
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By Paul Crowley
07th Nov 2021 22:27

Concur
Real life does not fit homework questions
The aim is to pass the relevant paper, not learn anything that will be useful in the working environment

The VAT comment is superb
A well known international tax that Sage describes as sales tax
But then sage would recognise a sidewalk and consider a pavement to be a road

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Replying to tom123:
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By Paul Crowley
07th Nov 2021 22:21

Never done one in real life and not much time left to get the opportunity
Impossible to accurately predict the future, changes in actual prices and interest rates
Will anything really be sold if competitor enters market

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