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

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:

Explanation / Answer

Solution 2.1:

Initial investment = R 924,000 + R400,000 = R1,324,000

Annual cash flows = R600,000 - R240,000 = R360,000

It is assumed that additional working capital will be recovered at the end of project period.

Solution 2.2:

Payback period = 3 + (1324000 - 1080000) / 360000 = 3.677 years

Solution 2.3:

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

Computation of NPV - Johnson B Ltd Particulars Amount (In R) Period PV Factor Present Value (In R) Cash Outflows: Initial investment        924,000.00 0 1                     924,000.00 Working capital        400,000.00 0 1                     400,000.00 PV of Cash outflows (A)                 1,324,000.00 Cash Inflows: Annual Cash Inflows        360,000.00 1-8 4.487322                 1,615,435.74 Salvage Value        138,000.00 8 0.326902                       45,112.44 Recovery of Working Capital        400,000.00 8 0.326902                     130,760.71 PV of Cash Inflows (B)                 1,791,308.90 NPV (B-A)                     467,308.90

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