Basic Senior Year Financial Questions - Assignment Example

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Basic Senior Year Financial Questions

The cost of capital and the tax rate are 12% and 30% respectively. Required: The net present value (NPV) of the investment Solution: (a) Project appraisal $ ‘000’ Year 0 1 2 3 4 5 Inflows - 800 750 900 1,200 1,100 Outflows - (65) (80) (50) (55) (70) Depreciation - (280) (280) (280) (280) (280) Inflow before tax - 455 390 670 865 750 Less tax @ 30% - (136.5) (117) (201) (259.5) (225) + dep. Back - 280 280 280 280 280 Cash flows - 598.5 553 749 885.5 805 I0 (1,400) - - - - - (1,400 598.5 553 749 885.5 805 PVIF 12%n 1.000 0.893 0.797 0.712 0.636 0.567 P.V (1,400) 534.5 440.7 533.3 563.2 456.4 Overall NPV = 1,128.1 The decision rule for NPV for accepting the project Under this method, a company should accept an investment venture if N.P.V. is positive i.e. if the present value of cash outflows exceeds that of cash inflows or at least is equal to zero (NPV ?0). This will rank project ventures giving the uppermost rank to that particular venture with highest NPV because this will give the maximum cash inflow or capital gain to the company. Net present value recognizes time value of money and such appreciates that a shilling now is more valuable than a shilling tomorrow and the two can only be compared if they are at their present value. ...Show more

Summary

Name Tutor Institution Subject Code Net Present Value Net present value is a discounting method of analyzing the viability of a given investment by taking into consideration the time value of money (Megginson, et al page 261). For instance, XYZ Limited has approached you for advice on an equipment to be purchased for use in a five year project…
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