(20 marks) Question 8 Eenhana Local Government in an effort to boost its revenue
ID: 2826469 • Letter: #
Question
(20 marks) Question 8 Eenhana Local Government in an effort to boost its revenue base decided to acquire a tractor that will be hired out to farmers at affordable charges. The tractor will cost N$ 300,000 and will generate an annual net cash inflow of N$140,000 for six years. The cost of borrowing to procure the tractor is 10%. Required: Using the Profitability Index Technique of Investment Appraisa and Net Present Value (NPV), advise the chairman of Eenhana Local Government whether to invest in the project or not. Discount Factors to be used are: Year Discount Factor 0.9091 0.8264 0.7513 0.6830 0.6209 0.5645Explanation / Answer
NPV
Profitability Index = PV value of cashflows/initial investment
=$609,728 / $300,000
= 2.032
Conclusion
By seeing in to Positive NPV and Profitability Index more than 1, investment in purchase of tractor is atmost feasible. Hence Eenhana Local Government can invest .
Year cash flows Discounting factor Discounting cashflows 0 initial investment A ($300,000) 1 $140,000 0.9091 $127,274 2 $140,000 0.8264 $115.696 3 $140,000 0.7513 $105,182 4 $140,000 0.6830 $95,620 5 $140,000 0.6209 $86,926 6 $140,000 0.5645 $79,030 Total B $609,728 NPV B-A $309,728
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