Finance & Accounting
Pages 7 (1757 words)
1. Estimate the NPV of the project Net Present Value Net Cash Flow Net Cash Flow Net Cash Flow Particulars Initial Outlay Year 1 Year 2 Year 3 ? Initial Capital Expenditure (12,000,000) Sales 8,000,000 12,000,000 16,000,000 Variable Costs (2,400,000) (3,600,000) (4,800,000) Fixed Costs (2,000,000) (2,000,000) (2,000,000) Depreciation (4,000,000) (4,000,000) (4,000,000) Taxable Profit (12,000,000) (400,000) 2,400,000 5,200,000 Tax @ 30% 3,600,000 120,000 (720,000) (1,560,000) Amount after tax (8,400,000) (280,000) 1,680,000 3,640,000 Add back Depreciation (Non cash item) 4,000,000 4,000,000 4,000,000 Net Cash Flow (8,400,000) 3,720,000 5,680,000 7,640,000 Discounting Factor @ 8% 1 0.93 0.86 0.
Sales increase from year 1 to year 2 by 1.5 times, but in the 3rd year it appears that the sales only increase by 1.33 times, which shows a decline as compared to the previous financial year. Variable cost is included as a percentage of the sales for the month, which is 30% of the sales for the year. All the fixed costs are assumed to be directly attributable to the project and thus are included in the cash flows. As mentioned in the project, the useful life of the facility will be three years, thus it will be depreciated on a straight line basis over three years. Depreciation is a non-cash item, but it is included in the cash flow forecasting because of the tax shield, since depreciation is also tax deductible. In first year, the company will have taxable loss, so it is assumed that the company will have taxable profit in the future, against which this taxable loss will be utilized, resulting in tax savings. ...