Question

[15 Marks] stion 1 Majimbos (Pty) Limited is considering a project that would require an initial investment of e924.000 and would have a useful life of 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 Required: Compute the net present value of the project. a) (10) b) Compute the payback period. (3) (2) c) Would you recommend the investment. Please use the following template to assist you: Time PV Value Factor Transaction No Period Working Capital Investment 1 2 Initial investment 3 Cash flows in 4 Cash flows out 5 Salvage value Working Capital Recovery ase ignore depreciation and taxes. TU er his
please kindly round off the numbers

Answer 1

a)

No.	Transaction	Time Period	Cash Inflow (Outflow)	Value Factor	PV
1	Working capital investment	0	$(400,000.00)	1	$     (400,000.00)
2	Initial investment	0	$(924,000.00)	1	$     (924,000.00)
3	Cash flows in	1 to 8	$ 600,000.00	4.487	$    2,692,200.00
4	Cash flows out	1 to 8	$(240,000.00)	4.487	$ (1,076,880.00)
5	Salvage value	8	$ 138,000.00	0.327	$         45,126.00
6	Working capital recovery	8	$ 400,000.00	0.327	$       130,800.00
7	NPV				$       467,246.00

b)

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

c)

As NPV of project is postive and payback period is also favorable, therefore project will be recommended for investment.