{"id":220039,"date":"2025-05-27T11:06:31","date_gmt":"2025-05-27T11:06:31","guid":{"rendered":"https:\/\/learnexams.com\/blog\/?p=220039"},"modified":"2025-05-27T11:06:34","modified_gmt":"2025-05-27T11:06:34","slug":"the-ambergast-corporation-is-considering-a-project-with-a-3-year-lifespan-and-an-initial-cost-of-1200-2","status":"publish","type":"post","link":"https:\/\/www.learnexams.com\/blog\/2025\/05\/27\/the-ambergast-corporation-is-considering-a-project-with-a-3-year-lifespan-and-an-initial-cost-of-1200-2\/","title":{"rendered":"The Ambergast Corporation is considering a project with a 3-year lifespan and an initial cost of $1,200."},"content":{"rendered":"\n

The Ambergast Corporation is considering a project with a 3-year lifespan and an initial cost of $1,200. The project is expected to generate annual savings of $360 for each of the three years.<\/p>\n\n\n\n

Required:
Evaluate the feasibility of this project based on financial analysis methods such as Net Present Value (NPV), Internal Rate of Return (IRR), or Payback Period.<\/p>\n\n\n\n

The Correct Answer and Explanation is:<\/mark><\/strong><\/p>\n\n\n\n

To evaluate the feasibility of The Ambergast Corporation\u2019s project, we will apply three key financial analysis methods: Net Present Value (NPV)<\/strong>, Internal Rate of Return (IRR)<\/strong>, and Payback Period<\/strong>.<\/p>\n\n\n\n

Assumptions:<\/h3>\n\n\n\n
    \n
  • Initial investment: $1,200<\/li>\n\n\n\n
  • Annual savings (cash inflow): $360 for 3 years<\/li>\n\n\n\n
  • Discount rate (assumed): 10%<\/li>\n<\/ul>\n\n\n\n
    \n\n\n\n

    1. Payback Period<\/strong><\/h3>\n\n\n\n

    The payback period is the time it takes to recover the initial investment. Payback Period=Initial InvestmentAnnual Cash Inflow=1,200360\u22483.33 years\\text{Payback Period} = \\frac{\\text{Initial Investment}}{\\text{Annual Cash Inflow}} = \\frac{1,200}{360} \\approx 3.33 \\text{ years}<\/p>\n\n\n\n

    Since the project only lasts 3 years, and the payback period is 3.33 years, the investment is not fully recovered within the project\u2019s lifespan<\/strong>. This is a negative indicator<\/strong>.<\/p>\n\n\n\n

    \n\n\n\n

    2. Net Present Value (NPV)<\/strong><\/h3>\n\n\n\n

    NPV=\u2211t=13360(1+0.10)t\u22121,200NPV = \\sum_{t=1}^{3} \\frac{360}{(1+0.10)^t} – 1,200 NPV=3601.10+3601.21+3601.331\u22121,200NPV = \\frac{360}{1.10} + \\frac{360}{1.21} + \\frac{360}{1.331} – 1,200 NPV\u2248327.27+297.52+270.50\u22121,200=895.29\u22121,200=\u2212304.71NPV \\approx 327.27 + 297.52 + 270.50 – 1,200 = 895.29 – 1,200 = -304.71<\/p>\n\n\n\n

    NPV = -$304.71<\/strong>, which means the project would decrease the firm’s value<\/strong>, hence it is not financially viable<\/strong>.<\/p>\n\n\n\n

    \n\n\n\n

    3. Internal Rate of Return (IRR)<\/strong><\/h3>\n\n\n\n

    We solve for IRR using the formula: 0=\u2211t=13360(1+IRR)t\u22121,2000 = \\sum_{t=1}^{3} \\frac{360}{(1+\\text{IRR})^t} – 1,200<\/p>\n\n\n\n

    Using a financial calculator or Excel:
    IRR \u2248 2.8%<\/strong><\/p>\n\n\n\n

    This is far below<\/strong> the assumed discount rate of 10%, indicating the return on investment is not attractive.<\/p>\n\n\n\n

    \n\n\n\n

    Conclusion:<\/h3>\n\n\n\n

    Based on the analysis:<\/p>\n\n\n\n

      \n
    • Payback Period<\/strong> exceeds the project life,<\/li>\n\n\n\n
    • NPV<\/strong> is negative, and<\/li>\n\n\n\n
    • IRR<\/strong> is below the cost of capital.<\/li>\n<\/ul>\n\n\n\n

      Therefore, The Ambergast Corporation should not proceed with the project<\/strong> as it is financially unfeasible<\/strong>.<\/p>\n\n\n\n

      \"\"<\/figure>\n","protected":false},"excerpt":{"rendered":"

      The Ambergast Corporation is considering a project with a 3-year lifespan and an initial cost of $1,200. The project is expected to generate annual savings of $360 for each of the three years. Required:Evaluate the feasibility of this project based on financial analysis methods such as Net Present Value (NPV), Internal Rate of Return (IRR), […]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"site-sidebar-layout":"default","site-content-layout":"","ast-site-content-layout":"default","site-content-style":"default","site-sidebar-style":"default","ast-global-header-display":"","ast-banner-title-visibility":"","ast-main-header-display":"","ast-hfb-above-header-display":"","ast-hfb-below-header-display":"","ast-hfb-mobile-header-display":"","site-post-title":"","ast-breadcrumbs-content":"","ast-featured-img":"","footer-sml-layout":"","ast-disable-related-posts":"","theme-transparent-header-meta":"","adv-header-id-meta":"","stick-header-meta":"","header-above-stick-meta":"","header-main-stick-meta":"","header-below-stick-meta":"","astra-migrate-meta-layouts":"default","ast-page-background-enabled":"default","ast-page-background-meta":{"desktop":{"background-color":"","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-opacity":"","overlay-gradient":""},"tablet":{"background-color":"","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-opacity":"","overlay-gradient":""},"mobile":{"background-color":"","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-opacity":"","overlay-gradient":""}},"ast-content-background-meta":{"desktop":{"background-color":"var(--ast-global-color-5)","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-opacity":"","overlay-gradient":""},"tablet":{"background-color":"var(--ast-global-color-5)","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-opacity":"","overlay-gradient":""},"mobile":{"background-color":"var(--ast-global-color-5)","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-opacity":"","overlay-gradient":""}},"footnotes":""},"categories":[25],"tags":[],"class_list":["post-220039","post","type-post","status-publish","format-standard","hentry","category-exams-certification"],"_links":{"self":[{"href":"https:\/\/www.learnexams.com\/blog\/wp-json\/wp\/v2\/posts\/220039","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.learnexams.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.learnexams.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.learnexams.com\/blog\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/www.learnexams.com\/blog\/wp-json\/wp\/v2\/comments?post=220039"}],"version-history":[{"count":0,"href":"https:\/\/www.learnexams.com\/blog\/wp-json\/wp\/v2\/posts\/220039\/revisions"}],"wp:attachment":[{"href":"https:\/\/www.learnexams.com\/blog\/wp-json\/wp\/v2\/media?parent=220039"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.learnexams.com\/blog\/wp-json\/wp\/v2\/categories?post=220039"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.learnexams.com\/blog\/wp-json\/wp\/v2\/tags?post=220039"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}