Cost and Financial Management Quiz Neha Arif -1984159

Numerical
Investment A
 Net Present Value (NPV):
Discount Rate = 14% = 0.14
Initial Cost = $ 500,000

PV1 = 50,000/ (1+0.14)1 = 50,000/ (1.14)1 = 50,000/ 1.14 = $ 43,859.6

PV2 = 38,000/ (1+0.14)2 = 38,000/ (1.14)2 = 38,000/ 1.2996 = $ 29,239.76
PV3 = 25,000/ (1+0.14)3 = 25,000/ (1.14)3 = 25,000/ 1.48154 = $ 16,874.33
PV4 = 55,000/ (1+0.14)4 = 55,000/ (1.14)4 = 55,000/ 1.68896 = $ 32,564.41
PV5 = 85,000/ (1+0.14)5 = 85,000/ (1.14)5 = 85,000/ 1.92541 = $ 44,146.44
PV6 = 90,000/ (1+0.14)6 = 90,000/ (1.14)6 = 90,000/ 2.19497 = $ 41,002.83
PV7 = 100,000/ (1+0.14)7 = 100,000/ (1.14)7 = 100,000/ 2.50226 = $ 39,963.87
PV8 = 50,000/ (1+0.14)8 = 50,000/ (1.14)8 = 50,000/ 2.85258 = $ 17,527.99

NPV = Σ PV – Cost (Investment)

NPV = $ 43,859.6 + $ 29,239.76 + $ 16,874.33 + $ 32,564.41 + $ 44,146.44 + $ 41,002.83 + $
39,963.87+ $ 17,527.99 - $ 500,000
NPV = $ 265,179.23 - $ 500,000
NPV = $ - 234,820.77

 Payback Period:
Initial Investment = $ 500,000

Year 0 $ 500,000
Year 1 $ 50,000 $ (450,000)
Year 2 $ 38,000 $ (412,000)
Year 3 $ 25,000 $ (387,000)
 Year 4 $ 55,000 $ (332,000)
Year 5 $ 85,000 $ (247,000)
Year 6 $ 90,000 $ (157,000)
Year 7 $ 100,000 $ (57,000)
Year 8 $ 50,000 $ (7000)

 Accounting Rate of Return:

Initial Investment = $ 500,000
Total Profit = $ 493,000
Subtract the total profit with the initial investment, we get:
= $ 493,000 - $ 500,000
= $ - 7000
Next is to calculate the net profit per annum by dividing the total net profit by the total number
of years.
= $ - 7000 / 8 = $ - 875
Now,
ARR = Average Annual Profit / Initial Investment * 100
ARR = $ - 875 / $ 500,000 * 100
ARR = - 0.00175 * 100
ARR = - 0.175 %

Investment B
 Net Present Value (NPV):
Discount Rate = 11% = 0.11
Initial Cost = $ 700,000

PV1 = 64,000/ (1+0.11)1 = 64,000/ (1.11)1 = 64,000/ 1.11 = $ 57657.6

PV2 = 55,000/ (1+0.11)2 = 55,000/ (1.11)2 = 55,000/ 1.2321 = $ 44639.2
PV3 = 16,000/ (1+0.11)3 = 16,000/ (1.11)3 = 16,000/ 1.3676 = $ 11699.3
PV4 = 47,000/ (1+0.11)4 = 47,000/ (1.11)4 = 47,000/ 1.5180 = $ 30961.7
PV5 = 94,000/ (1+0.11)5 = 94,000/ (1.11)5 = 94,000/ 1.6850 = $ 55786.3
PV6 = 75,000/ (1+0.11)6 = 75,000/ (1.11)6 = 75,000/ 1.8704 = $ 40098.3
PV7 = 125,000/ (1+0.11)7 = 125,000/ (1.11)7 = 125,000/ 2.0761 = $ 60209.04
PV8 = 150,000/ (1+0.11)8 = 150,000/ (1.11)8 = 150,000/ 2.3045 = $ 65090.04

NPV = Σ PV – Cost (Investment)

NPV = $ 57657.6 + $ 44639.2 + $ 11699.3 + $ 30961.7 + $ 55786.3 + $ 40098.3 + $ 60209.04 + $
65090.04 - $ 700,000
NPV = $ 366,141.48 - $ 700,000
NPV = $ - 333,858.52

 Accounting Rate of Return:

Initial Investment = $ 700,000
Total Profit = $ 626,000
Subtract the total profit with the initial investment, we get:
= $ 626,000 - $ 700,000
= $ - 74,000
Next is to calculate the net profit per annum by dividing the total net profit by the total number
of years.
= $ - 74,000 / 8 = $ - 9250
Now,
ARR = Average Annual Profit / Initial Investment * 100
ARR = $ - 9250 / $ 700,000 * 100
ARR = - 0.0132 * 100
ARR = - 1.32 %