Project Alpha (no excel, show calculations) Question 6 [13 Marks] Project Alpha

Question

Project Alpha

(no excel, show calculations)

Question 6 [13 Marks] Project Alpha requires an initual outlay of R35,000 and results in a single cash inflow of R56,367 50 at the end of five years Required: 6 1 If the cost of capital s 890, what are Alpha's NPV and Pp ls the project acceptable under each of these techniques? what are Alpha's NPV and Pl d the cost of capital is 12%? Is the project acceptable under this condition? 6 2 63 What is Alpha's payback period? Does payback make much sense for a project like Alpha? Motivate why

Explanation / Answer

1.Initial Outlay = 35,000

Inflow = 56,367 at the end of 5 years

NPV = Present Value of Cash inflows – Present Value of Cash Outflows

=56360*PVF(8%, 5 yrs) – 35000

=56360*0.681 – 35000 (from present value table)

=38381.16-35000

=3,381.16

NPV is positive, Project is acceptable

PI = PV of Cash Inflows/PV of Cash Outflows

=38,381.16/35000 = 1.09

Since >1, Acceptable

2.NPV = 56360*PVF(12%, 5 yrs) – 35000

=56360*0.567-35000

=31956.12 – 35000

=-3043.88

NPV negative, not acceptable

PI = 31956.12/35000 = 0.91

<1, Not acceptable

3.Payback Period = Initial Investment/Annual Inflows

= 5 years

Payback period does not make sense here since Alpha will generate cash inflows only at the end of 5 years and no cash flows will be generated before that. Payback period is basically the time period or years within which the initial investment will be recovered. Since this product will give one time cash flows, payback period is equal to 5 years only. Payback period is not a right measure for Alpha.

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