Net Present Value

FM – L2 – Q73 – Discounted Cash Flow

Calculate the breakeven rate of return for Kofi's taxi service project using NPV criteria with given cash flows and costs.

Question

Kofi, after his National Service and with no hope of securing a job in the formal sector, has decided to run a taxi service. The following have been made for the operation of a service between Asikrom and Sunyasi:
(i) Revenue totalling GH¢300 a week for 52 weeks in a year. This is net of fuel and other variable costs.
(ii) Tyres; four pieces for a year at GH¢120 per unit.
(iii) Maintenance and servicing; GH¢120 per month.
(iv) Salaries GH¢3,000 per year.
(v) Insurance GH¢350 per year.
The net cash flow will increase at 5% per annum for the next five years due to inflation. The cost of the vehicle is estimated at GH¢28,000. The project appears quite profitable based on the NPV criteria using the Government policy rate of 26%. However, the banks are offering rates far higher than the policy rate.

Required:
Calculate the breakeven rate of return for the project.

Answer

Find Related Questions by Tags, levels, etc.

Tags: Capital Budgeting, Cash Flow Analysis, Discounted cash flow, Internal Rate of Return, Net Present Value
Level: Level 2

Topic: Discounted cash flow

FM – L2 – Q70 – DCF: Risk and uncertainty

Calculate the expected NPV of a project with uncertain cash inflows affected by multiple probabilistic factors, using a 10% cost of capital.

Question

A company is considering whether or not to invest in a project where the investment would be GH¢5,250,000. The project would have a five-year life, and estimated annual cash flows are as follows:

Year	Cash inflows	Cash outflows
	GH¢	GH¢
1	3,000,000	1,500,000
2	4,000,000	1,800,000
3	5,000,000	2,400,000
4	4,000,000	1,700,000
5	3,000,000	1,000,000

The cost of capital is 10%.
The estimates of cash outflows are considered fairly reliable. However, the estimates of cash inflows are much more uncertain. Several factors could make the annual cash flows higher or lower than expected.
Factor 1: There is a 20% probability that government measures to control the industry will reduce annual cash inflows by 20%.
Factor 2: There is a 30% probability that another competitor will also enter the market: this would reduce the estimated cash inflows by 10%.
Factor 3: There is a 40% probability that demand will be stronger than expected. The company would not be able to supply more products to the market, but it would be able to sell at higher prices and cash inflows would be 5% higher than estimated.
Required
Calculate the expected net present value of the project.

Answer

Find Related Questions by Tags, levels, etc.

Tags: Cash Flows, Discounted cash flow, Expected value, investment appraisal, Net Present Value, Probability Analysis, Risk Assessment
Level: Level 2

Topic: DCF: Risk and uncertainty

FM – L2 – Q65 – DCF: Specific applications

Calculate the equivalent annual cost for replacing a machine every 1, 2, 3, and 4 years and recommend the optimal replacement policy.

Question

A business entity, Volta Ventures, is considering its policy for the replacement of machines. One type of machine in regular use is Machine Y. This machine has a maximum useful life of four years, but maintenance costs and other running costs rise with use. An estimate of costs and disposal values is as follows:

Machine Y: Purchase cost GH₵40,000

Year	Maintenance costs and other running costs in the year	Disposal value at the end of the year
	GH₵	GH₵
1	8,000	25,000
2	12,000	20,000
3	20,000	10,000
4	25,000	0

The cost of capital is 10%.

Required
Calculate the equivalent annual cost of a replacement policy for the machine of replacement:
(a) every one year
(b) every two years
(c) every three years
(d) every four years.
Recommend a replacement policy for the machine.

Answer

Find Related Questions by Tags, levels, etc.

Tags: Asset Replacement, Cash Flows, Cost of Capital, Depreciation, Discounted cash flow, Equivalent Annual Cost, Financial decision-making, investment appraisal, Machine Replacement, Net Present Value
Level: Level 2

Topic: DCF: Specific Applications

FM – L2 – Q64 – DCF: Specific applications

Evaluate whether to acquire a machine and recommend purchase or lease, considering NPV with tax and capital allowances.

Question

NexGen Enterprises is considering whether to acquire a new machine. The machine has a purchase cost of GH₵30,000, an expected useful life of five years, and a disposal value of GH₵6,000 at the end of year 5. The machine would generate additional cash flows of GH₵10,000 in each of its five years.
Two methods of financing are under consideration:
(i) To buy the machine with money obtained from a bank loan, at an interest rate of 8% after tax.
(ii) To lease the machine. The lease payments to the lessor would be GH₵7,000 at the end of each of the next five years.
The company’s cost of capital is 10% after tax.
Corporation tax is 30%. If the machine is purchased, the company will be able to claim capital allowances (tax depreciation allowances) of 25% each year on a reducing balance basis. Tax is payable at the end of the year following the year against profits earned during Year 1.

Required:
(a) Recommend whether the machine should be acquired.
(b) If your recommendation is to acquire the machine, recommend whether it should be purchased or leased.

Answer

Find Related Questions by Tags, levels, etc.

Tags: capital allowances, Cost of Capital, Discounted cash flow, Financing Decisions, investment appraisal, Lease vs Buy, Net Present Value, Taxation
Level: Level 2

Topic: DCF: Specific Applications

Tag (SQ): Net Present Value

Filter by Professional Bodies

Filter by Subject

Filter by Topics

Filter by Levels

FM – L2 – Q73 – Discounted Cash Flow

Calculate the breakeven rate of return for Kofi's taxi service project using NPV criteria with given cash flows and costs.

FM – L2 – Q70 – DCF: Risk and uncertainty

Calculate the expected NPV of a project with uncertain cash inflows affected by multiple probabilistic factors, using a 10% cost of capital.

FM – L2 – Q65 – DCF: Specific applications

Calculate the equivalent annual cost for replacing a machine every 1, 2, 3, and 4 years and recommend the optimal replacement policy.

FM – L2 – Q64 – DCF: Specific applications

Evaluate whether to acquire a machine and recommend purchase or lease, considering NPV with tax and capital allowances.

Our offerings

Community

Contact Info

Customer

Get In Touch

Tag (SQ): Net Present Value

Filter by Professional Bodies

Filter by Subject

Filter by Topics

Filter by Levels

FM – L2 – Q73 – Discounted Cash Flow

Calculate the breakeven rate of return for Kofi's taxi service project using NPV criteria with given cash flows and costs.

You're reporting an error for "FM – L2 – Q73 – Discounted Cash Flow"

FM – L2 – Q70 – DCF: Risk and uncertainty

Calculate the expected NPV of a project with uncertain cash inflows affected by multiple probabilistic factors, using a 10% cost of capital.

You're reporting an error for "FM – L2 – Q70 – DCF: Risk and uncertainty"

FM – L2 – Q65 – DCF: Specific applications

Calculate the equivalent annual cost for replacing a machine every 1, 2, 3, and 4 years and recommend the optimal replacement policy.

You're reporting an error for "FM – L2 – Q65 – DCF: Specific applications"

FM – L2 – Q64 – DCF: Specific applications

Evaluate whether to acquire a machine and recommend purchase or lease, considering NPV with tax and capital allowances.

You're reporting an error for "FM – L2 – Q64 – DCF: Specific applications"

Our offerings

Community

Contact Info

Customer

Get In Touch

admin

Pick a Form