Question

Coursework Topic Project Evaluation You work in the Finance Department of the supermarket chain 'Super'. The company is planning to expand its business by offering online orders and home delivery. The CEO and CFO need your expertise to decide whether it would be beneficial to pursue the new business project. The project will have a lifetime of 5 years and the top management will decide after these 5 years if this service will be offered permanently. Super plans to spend £800,000 now on advertising and £80,000 during the first year of the project. To set up the new service, Super has to invest in a fleet of delivery vans, the web portal, warehouse capacity, delivery crates etc. This initial investment will be approximately £2,500,000. It is estimated that at the end of 5 years, the delivery vans and the delivery equipment can be sold for £200,000. The wages for the delivery drivers who have to be hired for the pew service will be £500,000 per year. Finance 47 the Eust wease Sunsee, expects revenues from sales via the online delivery service £600,000, in the second year of £1,500,000, £2,500,000 in year 3, £2,000,000 in year 4 and £4,500,000 in the final years of the project. The discount rate Super uses is 5% and they usually expect projects to be paid back after 5 years.

Calculate NPV of project and advice CEO about accepting it

Answer 1

Year	Inflows	Outflows	Net cash flow	Discount Rate @ 5%	Discounted Cash flows
0	-	2500000+800000 so,(3,300,000.00)	(3,300,000.00)	1.0000	(3,300,000.00)
1	600,000.00	500000+80000, so (580,000.00)	20,000.00	0.9524	19,047.62
2	1,500,000.00	(500,000.00)	1,000,000.00	0.9070	907,029.48
3	2,500,000.00	(500,000.00)	2,000,000.00	0.8638	1,727,675.20
4	2,000,000.00	(500,000.00)	1,500,000.00	0.8227	1,234,053.71
5	4,500,000.00	(500,000.00)	4,000,000.00	0.7835	3,134,104.67
5	Salavage value: 200,000.00	-	200,000.00	0.7835	156,705.23
				NPV	3,878,615.91

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