Question

Question 1 [15 Marks] Majimbos (Pty) Limited is considering a project that would require an initial investment of R924,000 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. (10)

b) Compute the payback period. (3)

c) Would you recommend the investment. (2)

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
4	Cash flows out
5	Salvage value
6	Working Capital Recovery

Please ignore depreciation and taxes.  

Answer 1

a)

No.	Transaction	Time Period	Cash Inflow (Outflow)	Value Factor	PV
1	Working capital investment	0	-400000	1	-400000
2	Initial investment	0	-924000	1	-924000
3	Cash flows in	1 to 8	600000	4.487	2692200
4	Cash flows out	1 to 8	-240000	4.487	-1076880
5	Salvage value	8	138000	0.327	45126
6	Working capital recovery	8	400000	0.327	130800
7	NPV				467246

b)

Payback period = Initial investment/Net cash inflow = $924000/$360000 = 2.57 years

c)

As NPV of project is postive and payback period is also favorable, therefore project will be recommended for investment.

Please provide positive rating.