Question

Annual net profits at a facility are shown in the table below. Total capital for the facility
investment is known to be $ 140 000. Linear as the depreciation method in profitability calculations
depreciation will be accepted. Interest type compound interest and cash flows are separated.
It indicated. In case the minimum acceptable turning speed is 15%,
a) Net return method,
b) Investigate whether the investment is profitable using the net present value method.
Years Net profits, $ / year
1 30 800
2 20 000
3 25 000
4 35 000
5 10 000

Answer 1

The initial investment is $140000 and depreciation method is straight line for the life of 5 years.
We need to calculate NPV here.
PV = Cash Flow / (1+Interest Rate)^Duration

a) Net Return
RoR = (Net Profit / Initial Investment) * 100

Year	Cash Flow
0	-140000
1	30800
2	20000
3	25000
4	35000
5	10000
Total	-19200

( -19200 / 140000 ) * 100 = -13.71%

b) We will calculate the net cash flow and then discount it by 15%
Depreciation = Asset value - Salvage Value / Life in Years
(140000 - 0) / 5 = 28000

1st year
Profit - Depreciation expense = Net Cash Flow
30800 - 28000 = 2800

2800 / (1.15^1) = 2434.78
We can construct a table for these values

Year	Cash Flow	Depreciation	Net Cash Flow	PV @ 15%
0	-140000
1	30800	-28000	2800	2434.78
2	20000	-28000	-8000	-6049.15
3	25000	-28000	-3000	-1972.55
4	35000	-28000	7000	4002.27
5	10000	-28000	-18000	-8949.18
Total	-19200		-19200.00	-10533.82

NPV = -10533.82

The NPV is negative so the investment is not profitable.