Question

question 3: Capital Budgeting (16) You have an opportunity to invest in an income generating asset at an initial cost of NSO start of year three, the company invests a further 30 000 to improve the income generang You are expecting an annual cash inflow from this investment of N$20 000 for the first two years where after the expected cash inflow increases to NS35 000 for the next three years, before the has to be replaced and can be sold for N$4 500 to a scrap dealer at the end of year five. The cost o capital (discount rate) is set at 10%. Determine: The net present value (NPV) The discounted payback period The Profitability Index (PI) iv) Would you invest in this asset? Why? 10 marks 2 marks 2 marks 2 marks Interest Factors: Future Value Interest Factors (FVIF): Present Value Interest Factors (PVIF) Years 1 to 5 1,100; 1,210; 1,331; 1,464; 1,611 0,909; 0,826; 0,751; 0,683; 0,621

Answer 1

flow NS PVF @10% Present Value NS Cash flows NPV, Discounted Payback period and Productivity Index :- Cumulative Cash VE 100 Year Presen NS (70,000) 1.00 (70,000.00) (70,000.00) 20,000 0.91 18,181.82 (51,818.18) 20,000 0.83 16,528.93 (35,289.26) (30,000) 0.83 (24,793.39) (60,082.64) 35,000 0.75 26,296.02 (33,786.63) 35,000 0.68 23,905.47 9,881.16) 35,000 0.62 21,732.25 11,851.09 4,500 2,794.15 14,645.24 Net Present Value 14,645.24 0.62 Net Present value is $ 14,645/. Discounted Payback period is = 4 years +(9881.16/21732.25) Discounted Payback period is = 4.4547 years Profitability Index is = 1+Net present valueInitial investment) Profitability Index is = 1+(14645.24/70000) Profitability Index is = 1.2092 Times Since the Net present value of the assets cashflows is positive and PI is more than 1. Invetsment in asset should be accepted.