Question

QUESTION 18 Flight Ltd intends to operate an internal passenger airline business in Ghana. It intends to fly to all regional capitals in Ghana. Flight Ltd intends to buy four (4) light aircrafts at a cost of GHc1,000,000 per aircraft. The aircrafts will be used for five years the next five years is expected to be GHc200. The expected number of tickets to be sold and the associated costs for five years are provided below and sold for GHc200,000 per one. The average return ticket over Project Data YearAnnual Tickets 2018 2019 2020 2021 2022 500 4,000 11,000 10,000 7,000 Total cost GHc 660,000 700,000 800,000 830,000 940,000 The cost of capital for the firm is 10% per annum. All monies will be received and paid for in the years when revenue will be earned or expenditure will be incurred. Required Determine the net cash flow for the investment Determine the net present value for the proposed investment (6 marks) Is the proposed investment profitable and why? Determine the payback period. Explain two advantages of the net present value over the payback method of investment appraisal. (2 marks) a. (2 marks) b. c. (2 marks) d. (3 marks) e.

Answer 1

a. & b.
Net cash flow for the Investment
Year	0	2018	2019	2020	2021	2022
1.CAPEX cash flows(1000000*4)	-4000000
2.Salvage value(200000*4)						800000
Operating cash flows:
3.No.of tickets to be sold		500	4000	11000	10000	7000
4.Ticket revenue (Row 3*200/ticket)		100000	800000	2200000	2000000	1400000
5.Less: Costs		-660000	-700000	-800000	-830000	-940000
6.Net Opg. Cash flow(4-5)		-560000	100000	1400000	1170000	460000
7.Net annual cash flow(1+2+6)	-4000000	-560000	100000	1400000	1170000	1260000
8. PV F at 10% COC(1/(1+0.10)^n	1	0.90909	0.82645	0.75131	0.68301	0.62092
9.PV at 10%(7*8)	-4000000	-509091	82644.63	1051841	799125.7	782360.9
10. NPV(Sum row 9)	-1793119
c. NO.
It is not profitable as the NPV of cash flows at the firm's cost of capital ,10% is NEGATIVE
d. Pay-back period:
Net annual cash flow(1+2+6)	-4000000	-560000	100000	1400000	1170000	1260000
Cumulative cash flows	-4000000	-4560000	-4460000	-3060000	-1890000	-630000
It never pays back

e.
NPV	Payback
1.Takes into account cash flows over the entire period of the life of an investment /project.	Stops once the payback period is achieved & does not tell anything about cash flows beyond that period.
2.Attaches time value to money , using appropriate discount rates & then comparing the present values, to select projects.	Ordinary payback method does not attach any time value to the cash flows & hence almost always ,prone to be mis-leading , while selecting investments from among the choices .