Question

Information: The company purchases 5 factories, each costing £500,000. One factory is purchased at the start of each of the next 5 years. The cost of refurbishment is £200,000 per factory and is payable continuously for 1 year after the purchase. Once the refurbishment for a particular factory is complete, retail stores pay rent to the company for the factory at a rate of £48,000 pa payable monthly in arrears. Each factory is sold 10 years after completion of its refurbishment for £600,000.

The company employs a manager to run this project. She is paid £50,000 pa payable at the end of each month whilst the company has ownership of any of the factories.

Question: Calculate the net present value of the project assuming an interest rate of 4% pa effective.

Answer 1

Net Present Value = Present Value of Inflows (-) Present Value of Outflows

Decision Making: The project can be accepted is the Net Present Value is positive. Else, the project should be rejected.

Logic : Since each of the factories are purchased in a gap of one year, the net present value of factory 2 to factory 5 is calculated by further discounting for applicable number of years.