Question

TRIFOLIU EXAMNATION arks) B: MANAGEMENT ACCOUNTING policies debt due to a Sal pressure the region hager his stion 1 [15 Marks) Majimbos (Pty) Lim hos (Pty) Limited is considering a project that would require an initial investment of 2924,000 and would have a useful life of 8 years. The annual cash receipts would be R600,000 and the annual cash expenses would be R240,000. The salvage value of the assets used in the project would be R138,000. The company uses a discount rate of 15%. Additional Working Capital of R400,000 will be required for the project. Required: a) Compute the net present value of the project. b) Compute the payback period. c) Would you recommend the investment. Please use the following template to assist you: No Transaction Time Period Value Factor PV 1 Working Capital Investment 2 Initial investment 3 Cash flows in Cash flows out 5 Salvage value 6 Working Capital Recovery Please ignore depreciation and taxes. TUF

Answer 1

Solution In the given problem, following relevant information is provided: R R R Initial Investment Additional working capital required Salvage value of the assets Useful life of project Annual cash receipts Annual cash expenses Discount rate 924,000 400,000 138,000 8 Years 600,000 240,000 15% R R Required 1: Computation of net present value of the project No. Transaction Value Factor PV 1 2 3 4 5 6 Working capital investment Initial Investment Cash flows in (*) Cash flows out(*) Salvage value (**) Working Capital Recovery (**) Net Present Value Time Period Year o Year Year 1-8 Year 1-8 Year 8 Year 8 R (400,000)| of R (924,000) oil R 600,000 R (240,000) R 138,000 R 400,000 1.00000 R (400,000) 1.00000 R (924,000) 4.48732 R 2,692,392 4.48732 R (1,076,957) 0.32690 R 45,112 0.32690 R 130,760 Net Present Value R 467,307 Note: Present value factor and present value annuity factor is rounded off upto 5 decimal places. (*) Present value annuity factor is calculated as under: Present value annuity factor (Excel formula) = PV(15%,8,-1,,0) = 4.48732 (**) Present value factor is calculated as under: Present value factor (Excel formula) = (1/(1+15%)^8) = 0.32690 Required 2: Computation of Payback period of the project Step-1: Computation of total initial investment Capital investment in assets Working capital investment Total initial investment R R R 924,000 400,000 1,324,000

Step-2: Computation of Annual operating cash in-flows Annual cash receipts Annual cash expenses Annual operating cash inflows R 600,000 R (240,000) R 360,000 Step-3: Computation of Payback period Payback period Initial investment Annual cash inflows R 1,324,000 R 360,000 3.68 Years Payback period 3.68 Years Required 3: The Net present value of the project is positive, which indicates that the project shall provide the required return from the investment. Also, the payback period is less than the project life, which indicates that the invetsment shall be recovered before the project life. Hence, it is recommended to invest in the project.