Question

Top Spin company is considering investing in a roof top solar network to generate its own power. Assume that the expected annual cash inflows from new solat network will be 550,000. A SI 50,000 net initial investment is required and the network has five-year useful life and 18% required rate of return. Assume that the investment will occur immediately after management approves the project a. For making decision on whether to approve or reject the project, compute the Net Present Value (NPV) of this new investment and analyze whether it will be accepted or rejected and why. (10 marks) b. To determine a rate at which NPV will be zero, compute Internal Rate of Return and analyze the result. (10 marks)

Answer 1

= (a)_NET PRESENT I IL Cash VALUE PRESENT VALUE PRESEN VALUE OF CASH OF CASH INFLOWS OUTFLOWS. IL Present value Present value (I XUI ) 0-847 42,350 Year Inflow (1) factor @ 1897 1 50000 2 2 50,000 0.718 35,900 3 50,000 0.608 30,400 4 50,000 O.SIS 5 0.437 n = number of years. 25,750 50,000 21,850 $156,250 Present value facter i = interest rate factor. (1+i)n :. NPV = precent value of Cach In flow – Present value of Cash outflow $(156,250 150,000) Net present $6,250 :. The project will be accepted because Net present value of the project is positive , - value

(6) COMPUTATION OF INTERNAL_RATE OF RETURN Initial. Investment = 150.000 Interest @ 187 (C) (E) (F) Year I Cash Present present Present I Present value value Ivalue value factor (6 cc) factor @ 2011- (EXB) 1 0.833' 41,650 2 S0000 0.718 0.69434,700 50.000 0-608 0.578 28.900 Inflow » @ 1872 $50000 0.847 48,350 35900 30,400 3 4 50000 0.515 25750 0.482 24,100 S Sopoo 0.437 41850 0.40120,050 156250 149,400 o Initial Investment (150000) (150000) 6250 1600) こ Internal Rate of 엉 Return Initial Difference Lower Present value @ Rate - Investment in Lower t X lower Present Present value rate Rate rate vawe Higher , 18 t 156950 - 150000 Хэ. 156,25o. 149,400 rate 18+ 6250 x2 6850 IRR = 19.824.7.

А A Year 50 000 2 Cash Inflow PvF @19-8247. Present value (A xe) ) 0.834 41,700 0.696 34,800 59000 0.581 99,050 0.485 24,250 50000 3 4 50.000 5 Soooo 0.40.4 20,200 $ 150000 Presentvalue a Net Present value Present value of Cash Inflow of cash outflow $( 150000 - 150,000) = .: Result can be analysed as above.