Question

QUESTION 6: Capital Budgeting You have an opportunity to invest in an income generating asset at an initial cost of N$80 000. The cash flow generated from this asset is N$30 000 for the first three years and due to normal wear and tear, only N$20 000 in the next two years, after which it can be sold to a scrap dealer for N$10 000. The cost of capital is 12%. Use the relevant Interest Factors provided in Question 5 above to determine: 1) the net present value (NPV) ii) the discounted payback period iii) the Productivity Index (PI) iv) Would you consider doing this investment? Why? (14)

Answer 1

Present PVF @120 NPV, Discounted Payback period and Productivity Index - Cumulative Cash Year flow NS Value NS Cash flows NS (80,000) 1.00 (80,000.00) (80,000.00) 30,000 0.89 26,785.71 (53,214.29) 30,000 0.80 23,915.82 (29,298.47) 30,000 0.71 21,353.41 (7,945.06) 20,000 0.64 12,710.36 4,765.30 20,000 0.57 11,348.54 16,113.84 10,000 0.57 5,674.27 21,788.11 Net Present Value 21,788.11 Net Present value is $ 21,788/. Discounted Payback period is = 3 years +(7945.06/12710.36) Discounted Payback period is = 3.6251 years Profitability Index is = 1+(Net present value Initial investment) Profitability Index is = 1+(21788.11/80000) Profitability Index is = 1.2724 Times Since the Net present value of the assets cashflows is positive and PI is more than . Invetsment in asset should be accepted.