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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. 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?
Expert Solution
| 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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