Question 2 (15 marks) Johnson B (Pty) Limited is considering a project that woul

Question

Question 2 (15 marks)

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:

NB: Ignore taxes for this question (thus no depreciation should be considered)

No Transaction Time perios 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

Explanation / Answer

Computation of NPV - Johnson B Ltd Particulars Amount (In R) Period PVf@15% Present Value (In R) Cash Outflows: Initial investment                    924,000.00 0 1 924000 Working capital                    400,000.00 0 1                     400,000.00 PV of Cash outflows (A)                 1,324,000.00 Cash Inflows: Annual Net Cash Inflows (600000-240000)                          360,000 1-8 4.487322                 1,615,435.92 Salvage Value                    138,000.00 8 0.326902                       45,112.48 Recovery of Working Capital                    400,000.00 8 0.326902                     130,760.80 PV of Cash Inflows (B)                 1,791,309.20 NPV (B-A)                     467,309.20 Computation of Payback Period (in R) Period Cash inflow Cumm. Cash inflow 1                                            360,000                          360,000 2                                            360,000                          720,000 3                                            360,000                      1,080,000 4                                            360,000                      1,440,000 5                                            360,000                      1,800,000 6                                            360,000                      3,240,000 7                                            360,000                      3,600,000 8                                            898,000                      4,498,000 Payback period=3+(1324000-1080000)/360000=3.77 years As NPV of Project is Positive and payback period is also favourable therefore project will be recommended for Investment

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