Question

A Company tries to invest on project that cost $1.200.000.000 with 6 years estimated lifetime. The income statement will be expected as:

Sales		$ 1.500.000.000
Variable Cost		$ 900.000.000
Contribution Margin		$ 600.000.000
Fixed Cost
Promotion	$ 350.000.000
Deprecition	$ 150.000.000
Total Fixed Cost		$ 500.000.000
Net Profit		$ 100.000.000

1. With rate 11%, calculated the NPV and is the project need to be invested ?

2. Calculated the net cash flow yearly

3. Calculated the Payback Period?

4. Calculated the Simple Rate of Return?

Answer 1

1)

Required rate of return = 11%

Net cash flow yearly = $250000000

Estimated life of project = 6 years

Net cash flow yearly = Net profit per year + Depreciation = $100000000 + $150000000 = $250000000

Present value of net cash flows yearly = $250000000*Present value annuity factor(11%,6)

= $250000000*4.2305 = $1057625000

Cost of Project = $1200000000

Net Present value = Present value of net cash flows yearly - Cost of Project

= $1057625000 - $1200000000 = -$142375000

2)

Calculation of net cash flow per year:

Net profit per year = $100000000

Depreciation = $150000000

Net cash flow yearly = Net profit per year + Depreciation = $100000000 + $150000000 = $250000000

3)

Payback period = Cost pf Project/Net Annual cash inflows

$1200000000/$250000000 = 4.8 years

4)

Simple rate of return = Net Annual cash inflows /Cost of Project *100

= ($250000000/$1200000000) *100 = 20.83%