TPT Limited is planning to invest in a new project. The project will last for five years. Depreciation on project assets is provided on the straight-line basis over five years and will amount to £40,000 per annum. Net cash inflows from the project in years 1 to 5 are budgeted to be £80,000, £100,000, £120,000, £100,000 and £80,000. At the end of the five years, the project assets will be sold for £100,000. The payback period for the project is three years. What is the original cost of the investment in this project?

Question

Quizplus · Accepted Answer

The original cost of the investment can be calculated by adding the total depreciation over the project's life to the salvage value at the end of the project. Depreciation is £40,000 per annum over five years, totaling £200,000. The salvage value is £100,000. Therefore, the original cost is £200,000 (total depreciation) + £100,000 (salvage value) = £300,000.

TPT Limited Is Planning to Invest in a New Project