Question

Some background information:

Require return= 10.1%

WACC = 10.1%

Table 1 - Product Market Estimates Immediate total potential worldwide market for product is NZ$800 million revenue (equivalent). Total worldwide market is expected to grow by 5% annually. Projected a2 world-wide market share is expected to be 3% in the first year of operation and increasing by 1% annually (i.e. 4% of world-wide market in Y2, 5% in Y, etc.).

QUESTION:

What is the IRR and NPV? (please provide your workings)

Answer 1

Based on the given data, pls find below workings and calculations:

- Tax % is not mentioned in the given data and hence tax implications have not been considered.

Project - a2 World wide Market a2 Market Share based Revenue Capital Expenditure - Cost of Production Facilities Depreciation Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 80,00,00,000 84,00,00,000 88,20,00,000 92,61,00,000 97,24,05,000 1,02,10,25,250 2,52,00,000 3,52,80,000 4,63,05,000 5,83,44,300 7,14,71,768 4,00,00,000 80,00,000 80,00,000 80,00,000 80,00,000 80,00,000 Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Revenue 2,52,00,000 3,52,80,000 4,63,05,000 5,83,44,300 7,14,71,768 Variable Costs Fixed Production Costs Marketing Expenditure Depreciation Net Income 1,26,00,000 25,00,000 1,00,00,000 80,00,000 -79,00,000 1,76,40,000 25,00,000 70,00,000 80,00,000 1,40,000 2,31,52,500 25,00,000 50,00,000 80,00,000 76,52,500 2,91,72,150 25,00,000 30,00,000 80,00,000 1,56,72,150 3,57,35,884 25,00,000 10,00,000 80,00,000 2,42,35,884 Initial Cash Outflow -4,00,00,000 Cash Flows (Net Income + Depreciation) Discounting Factor Discounted Cash Flow Cumulative Discounted Cash Flow Payback period -4,00,00,000 1,00,000 81,40,000 1,56,52,500 1 0.9083 0.8249 0.7493 -4,00,00,000 90,827 67,15,058 1,17,27,941 -4,00,00,000 -3,99,09,173 -3,31,94,115 -2,14,66,175 12 12 12 2,36,72,150 0.6805 1,61,09,736 -53,56,439 12 3,22,35,884 0.6181 1,99,25,214 1,45,68,775 3 NPV IRR Payback Period in No.of Years 1,45,68,775 19.3% 4.3 Discounting Factor 10.10%

Computation:

Computation of IRR: This can be computed using formula in Excel = IRR("range of cashflows", discounting factor%);

Computation of Net Present Value (NPV) based on the Discounted Cash flows; The Discounting factor is computed based on the formula: For year 0, the discounting factor is 1; For Year 1, it is computed as = Year 0 factor /(1+discounting factor%) ; Year 2 = Year 1 factor/(1+discounting factor %) and so on;

Next, the cashflows need to be multiplied with the respective years' discounting factor, to arrive at the discounting cash flows;

The total of all the discounted cash flows is equal to its respective Project NPV of the Cash Flows;

Computation of Pay Back Period: Here, the period is computed for each project, based on cumulative discounted cash flows: If the cumulative value is less than or equal to zero, the period is considered as 12 months (it means that the net cumulative cash flow has not yet paid back the initial investment); Once the value turns positive in a particular year, the period for such year is observed at a proportion of actual discounted cash flow to the cumulative CF; This gives the period less than 12 months in such year; Once this is computed, total of all the years is taken and divided by 12, to arrive at the Payback period in no.of years.