ECR exam paper Dec 03

System
System Posts: 100,534 🤖 Admin 🤖
edited June 18 in AAT student discussion
i am struggling on this question paper if anone can help. Task 2.4 is calculating the payback period and i calculated it to be over 4 years so do not think i am doing it right. please help<BR><BR>Capital expenditure in yr 0 is 500,000<BR>for yr 1-4:<BR>sales revenue - variable costs x value factor<BR><BR>yr1 60000 x 0.909 = 54540<BR>yr2 150000 x 0.829 = 123900<BR>yr3 320000 x 0.751 = 240320<BR>yr4 80000 x 0.683 = 54640<BR><BR>but the question does say the company requires an annual rate or return of 10%??<BR><BR>i must be doing it wrong, do i times the income by the 10% and not the present value factor as i will need yr 5 amounts to calcualte it more accuratley?

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  • System
    System Posts: 100,534 🤖 Admin 🤖
    ECR exam paper Dec 03

    Charlie<BR>You are on the right track in your calcs.<BR>To find the NPV just add the present values for each year.<BR>= -£26,600 (a minus value)<BR><BR>The 10% required return is built into the discount factor so no further calcs are needed<BR><BR>The fact is the NPV is a minus value which means this project does not meet the criteria of generating a 10% return and as such would be rejected<BR><BR>sandy.hood@chichester.ac.uk

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