1) | calculation of incrementalcashflow | |||||||||
Year | 0 | 1 | 2 | 3 | 4 | |||||
a | Cost cancelling lease(30000*110%) | -33000 | ||||||||
b | Working capital (current assets) | -35000 | ||||||||
c | ||||||||||
d | Saving in cost | 190000 | 190000 | 190000 | 190000 | |||||
e | Depreciation (500000/4) | 125000 | 125000 | 125000 | 125000 | |||||
f | repairs | 15000 | ||||||||
g | Interest(500000*10%) | 50000 | 50000 | 50000 | 50000 | |||||
h | Oppurtunity cost (of building lease) | 30000 | 30000 | 30000 | 30000 | |||||
i | Net benefit before tax(d-e-f-g-h) | -15000 | -30000 | -15000 | -15000 | |||||
j | Tax@30%(i*30%) | -4500 | -9000 | -4500 | -4500 | |||||
k | Net benefit after tax(i-j) | -10500 | -21000 | -10500 | -10500 | |||||
l | Operating cashflow(k+e) | 114500 | 104000 | 114500 | 114500 | |||||
m | Working capital realised | 35000 | ||||||||
n | Post tax salvage value [20000*(1-0.3)] | 14000 | ||||||||
o | Repayment of loan | -500000 | ||||||||
p | Total cashflow(l+m+n+o) | -68000 | 114500 | 104000 | 114500 | -336500 | ||||
q | PVF@12 % | 1 | 0.8929 | 0.7972 | 0.7118 | 0.6355 | ||||
r | Discounted CF (p*q) | -68000 | 102232.1 | 82908.16 | 81498.84 | -213852 | ||||
b) | Total cash out flow | = | 68000+336500 | |||||||
= | 404500 | |||||||||
Total cash inflow | = | 114500+104000+114500 | ||||||||
= | 333000 | |||||||||
Since total cash out flow is more than total cash inflow,the payback period is more than 4 years (beyond project life) | ||||||||||
c) | NPV | = | Sum of all cashflows | |||||||
= | -15212.7 | |||||||||
d) | present value index | = | Sum of cashflow in year 1 to yr 4/initial year outflow | |||||||
= | (102232+82908+81498-213852)/68000 | |||||||||
= | 0.776265 | |||||||||
e) | The company should not purchase equipment as NPV is negative& PV index is less than 1 | |||||||||
Note | ||||||||||
$25000 on feasibility study is sunk cost & will not be considered |
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