Question

60.000 80.00 10 years 50.000 8 years | Question-2 (16 pts, 10+6) 4 company is operating fashion clothing concessions in several large department stores A major store is opening its first provincial branch and the company is currently negotiating Corms for an in-store concession. The company must recoup within 3 years, after that time, the company will be required to completely refurbish their space. The company has had a estimate of initial cost of 89.000 great deal of experience in this type of shop-fitting and the directors are, confident in their for shop fitting. There will be additional advertising expenditure of 10.000 t in the first year to be treated as a cash flow arising at time 1). I However, the cash inflows arising from the project are less easy to estimate. The directors have prepared two sets of figures - one optimistic and one pessimistic. Their net cash inflow projections are as follows Time Optimistic scenario 56.000 66.000 68.000 Pessimistic scenario 32.000 35.000 36.000 # 29:52: T 20-TO-ozoz question:3 (24 pt.10) Calculate the no-return payback period for both scenarios. Calculate the expected net present value of the project if the probability of optimistic scenario is 40% and pessimistic one is 60% (Interest rate is 8%) WWONI Ashe

Answer 1

(i) No-profit pay back period:

The advertisement expense in year 1 is reduced from the cash inflow of that year.

No-profit pay back period (ordinary) is is as follows (rounded to two decimals):

Optimistic Scenario: 1.65 years

Pessimistic Scenario: 2.89 years

Details of calculation as follows:

A Н 1 Pay back period 2 3 4 Initial investment in year 0 = 89000 Optimistic Scenario Pessimistic Scenario Investment to Investment to 8 Year (t) Year (t) Cash flow ( be recovered Cash flow (C) be recovered -89000 -89000 46000 22000 -67000.00 10 -43000.00 11 66000 23000.00 35000 -32000.00 68000 12 3 91000.00 36000 4000.00 13 14 15 Pay back period 16 Last whole year of recovery Pay back period 1 Last whole year of recovery 43000 Balance after last whole year of recovery 66000 Next year recovery 0.651515152 Fraction of pay back year 1.651515152 Total pay back period years 17 Balance after last whole year of recovery 32000 18 Next year recovery 36000 19 Fraction of pay back year 0.88888889 20 Total pay back period years 2.88888889 21 ш

(ii) Expected NPV of the project is 197,636.13 as follows:

fe =D11+G11 G12 G. 1 Interest rate 8% Scenario Optimistic Scenario Pessimistic 2 Year Cash Flow Cash Flow PV PV Value Value Cell ref Cell ref 4 89,000 E5 89,000 B5 89,000 89,000 46,000 B6/(1+B1)^A6 66,000 B7/(1+B1)^A7 68,000 B8/(1+B1)^A8 22,000 E6/(1+B1)^A6 35,000 E6/(1+B1)^A7 36,000 E7/(1+B1)^A8 42592.59259 20370.37037 30006.85871 56584.36214 3 53980.59239 28577.96068 9 NPV = Sum of PVs SUM(D5:D8) SUM(G5:G8) 242,157.55 167,955.19 10 Probability 11 NPV*Probability 40% 60% D10*D11 G10*G11 100,773.11 96,863.02 197,636.13 12 Expected Project NPV= SUM of( Scenario NPV*Probability) D12+G12 13