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Homework answers / question archive / Ventures Capital, a key distributor of Voltic Water and other assorted products is considering investing Ghc335,600 in a project at Kasoa with a five year life

Ventures Capital, a key distributor of Voltic Water and other assorted products is considering investing Ghc335,600 in a project at Kasoa with a five year life

Finance

Ventures Capital, a key distributor of Voltic Water and other assorted products is considering investing Ghc335,600 in a project at Kasoa with a five year life. The project will result in an increase in the company's turnover of Ghc350,000 at additional fixed cost of Ghc110,000 and a variable costs ofGhc150,000.


At the end of the project in five years’ time, the assets will be sold for Ghc35,000.The company's required rate of return is 10%. Assuming you are the financial director of such company:


(a) How will you determine the Net Present Value of the project of Ventures Capital?

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Time line   0 1 2 3 4 5    
                   
                   
                   
Cost of new machine   -335600              
                   
=Initial Investment outlay   -335600              
                   
                100.00%  
Sales     350000 350000 350000 350000 350000    
Profits Sales-variable cost 200000 200000 200000 200000 200000    
Fixed cost     -110000 -110000 -110000 -110000 -110000    
                   
-Depreciation Cost of equipment/no. of years -67120 -67120 -67120 -67120 -67120 0 =Salvage Value
                   
=Pretax cash flows     22880 22880 22880 22880 22880    
-taxes =(Pretax cash flows)*(1-tax) 22880 22880 22880 22880 22880    
+Depreciation     67120 67120 67120 67120 67120    
=after tax operating cash flow     90000 90000 90000 90000 90000    
                   
                   
                   
                   
+Proceeds from sale of equipment after tax =selling price* ( 1 -tax rate)         35000    
+Tax shield on salvage book value =Salvage value * tax rate         0    
=Terminal year after tax cash flows             35000    
                   
Total Cash flow for the period   -335600 90000 90000 90000 90000 125000    
Discount factor= (1+discount rate)^corresponding period 1 1.1 1.21 1.331 1.4641 1.61051    
Discounted CF= Cashflow/discount factor -335600 81818.18182 74380.16529 67618.33208 61471.211 77615.165    
NPV= Sum of discounted CF= 27303.06            

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