1) a) i) Payback period is determined by Net Cash outflows / Cash in flows per year. K10,000 / K4000 = 2.5 years.
1) a) ii) Discounting rate of 15% is used to work out the NPV. NPV is the sum total of all the cash flows expected through out the life of the asset. Year 1 cash outflows = -10,000, Year 1 cash inflows = 4000 / (1+0.15) = 3478, Year 2 Cash flows = 4000 / (1+0.15)^2 = 3025, Year 3 Cash flows = 4000 / (1+0.15)^3 = 2,632, Year 4 Cash flows = 4000/ (1+0.15)^4 = 2286, Year 5 cash flows = 4000 / (1+0.15)^5 = 1989. Adding up all the cash-flows, the NPV = K3,410
1) a) iii) IRR is a rate at which cash-inflows and cash-outflows equals.
0 = -10,000+ 3478/(1+IRR)^1+ 3025/(1+IRR)^2 + 2632 / (1+IRR)^3+2286 / (1+IRR)^4 + 1989 / (1+IRR)^5
IRR = ~12%
2) NPV is the best indicator on which plan will be beneficial. Discount rate of 20% could be used to compute NPV.
Plan B is recommended given higher NPV v/s Plan A. Workings are below.
Plan A provides NPV of 47.8
Cash Outlay | -750.0 | |
Yearly inflows | Discount Factor | Discounted Cash Flow |
300 | 0.833333 | 250.0 |
400 | 0.694444 | 277.8 |
300 | 0.578704 | 173.6 |
200 | 0.482253 | 96.5 |
NPV | 47.8 |
Plan B provides NPV of 72.7
Cash Outlay | -940.0 | |
Yearly inflows | Discount Factor | Discounted Cash Flow |
500 | 0.833333 | 416.7 |
400 | 0.694444 | 277.8 |
300 | 0.578704 | 173.6 |
300 | 0.482253 | 144.7 |
NPV | 72.7 |
c) Will be answered seperately. In a multiple question, per the guidelines upto 4 questions can be answered. Four questions are already answered for this multiple question.
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