Question 14.

19 - Colin Drury
Year
0 1 2 3 4
Investment - 4,500
Working Capital - 300 - 120 - 131 - 143 - 156
Sales 3,675 5,402 6,159 6,977
Material - 589 - 908 - 1,198 - 1,537
Labour - 1,177 - 1,815 - 2,396 - 3,075
Overhead - 53 - 110 - 116 - 122
Taxation - 256 - 604 - 636
Net Cashflows - 4,800 1,737 2,182 1,702 1,452
Discount Factor 1 1 1 1 1
PV - 4,800 1,510 1,650 1,119 830
NPV 1,440
IRR 27.06% You should calculate in your register for practice.

The NPV is 1440 and it is therefore recommended that the project should be undertaken. Note that the interest cost is alrea
incorporated in the DCF calculation and should not be included in the cash flows when calculation present values.

In dimisnishing balane method or written donw value, last year balance amount fully depreciated and balance must be 0. Se

It is assumed that the working capital is released at the end of the project.
 5 6 W-1 1 2
Sales 3,675 5,402
851 Material 589 908
6,790 Labour 1,177 1,815
- 1,449 Overhead 53 110
- 2,899 Capital Allowance or Tax Depreciation (W-2) 1,125 844
- 128 Taxable Profit 732 1,726
- 619 - 311 Taxation 256 604
2,546 - 311
0 0 Tax Depreciation - W2
1,266 - 135 Opening Dep WDV
4,500 1,125 3,375
for practice.
3,375 844 2,531
2,531 633 1,898
the interest cost is already
present values. 1,898 475 1,424
1,424 1,424 - 0

nd balance must be 0. See Dep Working 2.

3 4 5
6,159 6,977 6,790
1,198 1,537 1,449
2,396 3,075 2,899
116 122 128
633 475 1,424
1,816 1,769 890
636 619 311
Question 14.20 - Colin Drury

Standard 0 1 2 3 4 5
Investment - 50,000
Working Capital - 10,000 10,000
Pre-Tax Cashflows 20,500 22,860 24,210 23,410
Depreciation 12,500 9,375 7,031 21,094
Profit before taxation 8,000 13,485 17,179 2,316
Tax @ 35% 2,800 4,720 6,013 811
Profit after taxation 8,000 10,685 12,459 - 3,696 - 811
Add: Depreciation 12,500 9,375 7,031 21,094 -
Net Cashflows - 60,000 20,500 20,060 19,490 27,397 - 811
Discount Factor 1.00 0.89 0.80 0.71 0.64 0.57
PV - 60,000 18,304 15,992 13,873 17,412 - 460
NPV 5,120
Payback 3 Years Approx.

Deluxe 0 1 2 3 4 5
Investment - 88,000
Working Capital - 10,000
Pre-Tax Cashflows 32,030 26,110 25,380 25,940 38,560
Depreciation 22,000 16,500 12,375 9,281 6,961
Profit before taxation 10,030 9,610 13,005 16,659 31,599
Tax @ 35% 3,511 3,364 4,552 5,831
Profit after taxation 10,030 6,100 9,642 12,107 25,769
Add: Depreciation 22,000 16,500 12,375 9,281 6,961
Net Cashflows - 98,000 32,030 22,600 22,017 21,388 32,729
Discount Factor 1.00 0.88 0.77 0.67 0.59 0.52
PV - 98,000 28,096 17,390 14,861 12,664 16,999
NPV 5,529
Payback 4 Years Approx.
 6 7 Depreciation Working
Standard
Year Opening Dep WDV
1 50,000 12,500 37,500
2 37,500 9,375 28,125
3 28,125 7,031 21,094
4 21,094 21,094 -

Deluxe
Year Opening Dep WDV
1 88,000 22,000 66,000
2 66,000 16,500 49,500
3 49,500 12,375 37,125
4 37,125 9,281 27,844
5 27,844 6,961 20,883
6 20,883 20,883 -

6 7

10,000
35,100
20,883
14,217
11,060 4,976
3,158 - 4,976
20,883
34,040 - 4,976
0.46 0.40
15,508 - 1,989
Question 14.21 - Colin Drury

Years
Project A 0 1 2 3 4
Initial Outlay - 246,000
Cash Inflows 70,000 70,000 70,000 70,000
Net Cashflows - 246,000 70,000 70,000 70,000 70,000
PV Factor 1 1 1 1 1
PV - 246,000 62,500 55,804 49,825 44,486
NPV 6,334
Profitability Index 1.0257

Years
Project B 0 1 2 3 4
Initial Outlay - 180,000
Cash Inflows 75,000 87,000 64,000 -
Net Cashflows - 180,000 75,000 87,000 64,000 -
PV Factor 1 1 1 1 1
PV - 180,000 66,964 69,356 45,554 -
NPV 1,874
Profitability Index 1.0104

Years
Project C 0 1 2 3 4
Initial Outlay - 175,000
Cash Inflows 48,000 48,000 63,000 73,000
Net Cashflows - 175,000 48,000 48,000 63,000 73,000
PV Factor 1 1 1 1 1
PV - 175,000 42,857 38,265 44,842 46,393
NPV - 2,643
Profitability Index 0.9849

Years
Project D 0 1 2 3 4
Initial Outlay - 180,000
Cash Inflows 62,000 62,000 62,000 62,000
Net Cashflows - 180,000 62,000 62,000 62,000 62,000
PV Factor 1 1 1 1 1
PV - 180,000 55,357 49,426 44,130 39,402
NPV 8,316
Profitability Index 1.0462

Years
Project E 0 1 2 3 4
Initial Outlay - 180,000
Cash Inflows 40,000 50,000 60,000 70,000
Net Cashflows - 180,000 40,000 50,000 60,000 70,000
PV Factor 1 1 1 1 1
PV - 180,000 35,714 39,860 42,707 44,486
NPV 5,464
Profitability Index 1.0304

Years
Project F 0 1 2 3 4
Initial Outlay - 150,000
Cash Inflows 35,000 82,000 82,000 -
Net Cashflows - 150,000 35,000 82,000 82,000 -
PV Factor 1 1 1 1 1
PV - 150,000 31,250 65,370 58,366 -
NPV 4,986
Profitability Index 1.0332
 Project Rankings NPV PI
5 1 D D
2 A F
70,000 3 E E
70,000 4 F A
1 5 B B
39,720 6 C C

The ranking differ because NPV is an absolute measure whereas the

profitability index is a relative measure that takes into account the
different investment cost of each project.
5
b)
- The objective is to select a combination of investment that will
- maximize NPV subject to a total capital outlay of 620,000. Project A
1 and E are mutually exclusive and Project C has a negative NPV. The
- following are potential combination of Projects:

Projects
A,B,D 16,524 - 606,000
A,B,F 13,673 - 576,000
5 A,D,F 20,114 - 576,000
B,D,E 15,654 - 540,000
- B,D,F 15,176 - 510,000
- D,E,F 18,766 - 510,000
1
-

-
-
1
-

5
40,000
40,000
1
22,697

-
-
1
-
Question 14.23 - Colin Drury

One Year Replecement

1 2 3 Replacement Cost Equivalent Annual Cost

1,053 - 1,347 - 1,536

Two Year Replecement

1 2 3 Replacement Cost Equivalent Annual Cost

615.574 - 1,850 - 1,124

Three Year Replecement

1 2 3 Replacement Cost Equivalent Annual Cost

202.4915 - 2,379 - 1,025

The Three Year replacement has the lowest equivalent annual cost. Therefore the three year replacement is the preferred a
lacement is the preferred alternative.