Question 1

Project Alpha requires an initial investment of $200,000. It is expected to generate annual cash flows of $60,000 for 5 years. At the end of year 5, the equipment can be sold for $20,000. The company's required rate of return is 10%. The present value factors for 10% are:
- PV of $1 (n=5): 0.621
- PV of Annuity (n=5): 3.791

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

Accepted Answer

Calculate PV of annual cash flows (Annuity factor). Calculate PV of salvage value (Single sum factor). Sum them and subtract Initial Investment.

Question 2

What mistakes do candidates make on this CPA question?

Accepted Answer

Forgetting salvage value; using wrong PV factor; not subtracting initial investment.

How to approach this question

Full Answer

Common mistakes

Practice the full CPA BAR Practice Exam 3

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