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Johnson B (Pty) Limited is considering a project that would require an initial investment of R924,...

Johnson B (Pty) Limited is considering a project that would require an initial investment of R924, 000 and would have a useful life of eight (8) years. The annual cash receipts would be R600,000 and the annual cash expenses would be R240,000. The salvage value of the assets used in the project would be R138,000. The company uses a discount rate of 15%. Additional Working Capital of R400,000 will be required for the project. 2.1 Compute the net present value of the project (10) 2.2 Compute the Payback period (3) 2.3 Would you recommend the Investment (2) Please use the following template to assist you: TEMPLATE No Transaction Time period Value Factor PV 1 Working capital investment 2 Initial investment 3 Cash flows in 4 Cash flows out 5 Salvage value 6 Working capital recovery 7 NPV

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Answer #1

1.

No. Transaction Time Period Cash Inflow (Outflow) Value Factor PV
1 Working capital investment 0 -400000 1.000 -400000
2 Initial investment 0 -924000 1.000 -924000
3 Cash flows in 1 to 8 600000 4.487 2692200
4 Cash flows out 1 to 8 -240000 4.487 -1076880
5 Salvage value 8 138000 0.327 45126
6 Working capital recovery 8 400000 0.327 130800
7 NPV 467246

Note: Template does not include a column for the amounts which has been inserted without which NPV cannot be calculated.

2. Payback period = Initial investment/Net cash inflow = $924000/$360000 = 2.57 years

3. Yes

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