Question

M (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. a) Compute the net present value of the project b) Compute the payback period. c) Would you recommend the investment. Please use the following template to assist you: Transaction Time Period Value Factor 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

fx no AB C D E F G no transaction working capital investment initial investment cash flows in cash flows out salvage value working capital recovery time period 0 0 10-8 1--8 value | factor PV -400,000 1.00000 -400,000 -924,000 1.00000 -924,000 600,000 4.48732 2,692,392 -240,000 4.48732 -1,076,957 138,000 0.32690 45,112 400,000 0.32690 130,760 8 a net present value of project = present value of all the cash flows net present value of project = $ 467,307.40 payback period = initial investment / net annual cash flow payback period = 924,000/ (600,000-240,000) payback period = 924,000 / 360,000 payback period = 2.57 years decision - YES, the investment should be made in the project. reason - because the net present value of the project is positive. note - the factors used have been rounded to 5 decimal places.

for formulas and calculations, refer to the image below -

| X ✓ fx no AB time period transaction working capital investment initial investment cash flows in cash flows out salvage value working capital recovery 1--8 1--8 value factor PV - 400000 =ROUND(-PV(15%,0,0,1),5) =E3*F3 -924000 =ROUND(-PV(15%,0,0,1),5) =E4*F4 600000 =ROUND(-PV(15%,8,1,0),5) =E5*F5 -240000 =ROUND(-PV(15%,8,1,0),5) =E6*F6 138000 =ROUND(-PV(15%,8,0,1),5) =E7*F7 400000 =ROUND(-PV(15%,8,0,1),5) =E8*F8 8 net present value of project = present value of all the cash flows net present value of project = =SUM(G3:68) payback period = initial investment / net annual cash flow payback period = 924,000 / (600,000-240,000) payback period = 924,000 / 360,000 payback period = =924000/360000 years decision - YES, the investment should be made in the project. reason - because the net present value of the project is positive. note - the factors used have been rounded to 5 decimal places.

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