Question

A company is set up to refurbish old factories and turn them into retail outlets. The company purchases 5 factories each costing half a million pounds. One factory is purchased at the start of each of the next 5 years. The cost of refurbishment is £20,000 per factory and is payable continuously for one year after the purchase. Once the refurbishment for a particular factory is complete, retail stores pay rent to the company for the factory at a rate of £48,000 pa payable monthly in arrears. Eaclh factory is sold 10 years after completion of its refurbishment for E600,000. The company employs a manager to run this project. She is paid £50,000 pa payable at the end of each month whilst the company has ownership of any of the factories. Calculate: (a) the net present value of the project assuming an interest rate of 4% pa effective the discounted payback period the accumulated profit on the day that the last factory is sold (b) (c)

A company is set up to refurbish old factories and turn them into retail outlets. The company purchases 5 factories each costing half a million pounds. One factory is purchased at the start of each of the next 5 years. The cost of refurbishment is £20,000 per factory and is payable continuously for one year after the purchase. Once the refurbishment for a particular factory is complete, retail stores pay rent to the company for the factory at a rate of £48,000 pa payable monthly in arrears. Eaclh factory is sold 10 years after completion of its refurbishment for E600,000. The company employs a manager to run this project. She is paid £50,000 pa payable at the end of each month whilst the company has ownership of any of the factories. Calculate: (a) the net present value of the project assuming an interest rate of 4% pa effective the discounted payback period the accumulated profit on the day that the last factory is sold (b) (c)

Answer 1

particulars year pv@4% amount amount
cash outflow		0	1		550000	550000
purchase factory
		1	0.962		574000	552188
2			0.925		574000	530950
3			0.889		574000	510286
4			0.855		574000	490770
5			0.822		574000	471828
6			0.79		50000	39500
7			0.76		50000	38000
		8	0.731		50000	36550
		9	0.703		50000	35150
		10	0.676		50000	33800
cash inflow
		10	3.1699		480000	1521552
		10	3.1699		3000000	9509700
net npv						7742230

payback period

npv of cash outflow / npv of cash inflow

11031252 / 3289022 = 3.3539 approx

accuimulated profit :-

3480000 - 3670000 = 190000