ICAEW SE · Chapter 5 · Question 13 of 13
A management accountant is appraising a project expected to generate annual net cash inflows of £500,000 before any carbon cost. The project will emit 2,000 tonnes CO2e per year. The company applies an internal (shadow) carbon price of £80 per tonne in investment appraisal. What annual net cash inflow should be used in the appraisal after applying the internal carbon price?
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: A) £340,000
Explanation
The annual carbon cost = 2,000 tonnes x £80 = £160,000. Adjusted annual net cash inflow = £500,000 - £160,000 = £340,000. Using an internal carbon price helps the company anticipate future carbon costs and avoid investing in projects that could become uneconomic. Adding the cost (£660,000) or deducting only £80 (£499,920) are errors.
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