Question

BAF 2104: FINANCIAL MANAGEMENT 1 CAT

QUESTION ONE

A company is considering an investment proposal to install new milling controls. The project will cost Kes50,000,000. The facility has a life expectancy of five years and no salvage value. The company’s tax rate is 40%. The estimated cash flows from the proposed investment proposal are as follows:

Year                            CF Kes 000

1                                  13,000

2                                  14,000

3                                  18,000

4                                  23,000

5                                  25,000

Compute:

1. Accounting Rate of Return                                                                      
2. Discounted payback period at 6% discounting factor                            
3. Net present value at 15% discounting factor and advise management on the project’s feasibility

Answer 1

Ans 1. ARR (Accounting rate of Return is 54.32%

50000000 Depreciatior 10000000 5 Year Investment Life A CF Kes Depreciation 13000000 10000000 14000000 10000000 18000000 10000000 23000000 10000000 25000000 10000000 C=A+B PBT Tax @ 40% 23000000 9200000 24000000 9600000 28000000 11200000 33000000 13200000 35000000 14000000 E=C-D PAT Depreciration 13800000 10000000 14400000 10000000 16800000 10000000 19800000 10000000 21000000 10000000 3 4 5 Cash Flow 23800000 24400000 26800000 29800000 31000000 135800000.00 13,58,00,000 Total Profit After Tax Total year ARR( Accounting rate of return) = Average Profit / Initial Investment =27160000/5000000 Avg. Profit = Total Profit/Total year au ARR = 0.5432 =135800000/5 27160000 Avg. Profit = ARR= 54.32% Initail Investment = 50000000

Ans 2.

Discounted payback period is approximate 2 years and 3 months.

24 Year 1 2 3 Discount Discounted Cash Flow Factor @6% Cashflow 23800000 0.943396226 22452830.19 24400000 0.88999644 21715913.14 26800000 0.839619283 22501796.79 29800000 0.792093663 23604391.16 31000000 0.747258173 23165003.36 5 year Amount pendin Amt received Amount pending Discounted Payback = 1 2 50000000 27547169.81 5831256.675 22452830.19 27547169.8 21715913.14 5831256.67 22501796.79 -16670540 For Proportion =5831256.675/22501796.79 0.259146269 3.10975522 0 Discounted Payback = 11 2.26 year Approximate 2 years and 3 months

Ans.3 Since NPV is positive management can invest in the project. And project is feasible.

1 Tt in i 2 Discounting Discounted Cash Flow Factor @ 15% Cashflow 23800000 0.8696 20695652.17 24400000 0.7561 18449905.48 26800000 0.6575 17621435.03 4 29800000 0.5718 17038246.72 5 31000000 0.4972 15412478.79 89217718.2 m m -al Net present value = PV of cash inflow - PV of Cash outflow =89217718.2 -50000000 NPV 39217718.2 -IAIA Since NPV is positive Management can invest in the project