Question

ı have completed the calculations of strategy study. i calculated that if i have 1 factory in belgium our annual cost would be $1,2 million per annum. This is saving of $1.8000,000 millions ($900k when we start the project , $900k after 12 months. annual savings will star coming in only after 2nd year ie 24th month after. If i go for 2 factories option (Belgium and İtaly) than the annual savings go down to $300k per annum for 1 year on but i only have to invest $400k in the beginning. The finance director asked me to : show the inflows and outflows on a chart and calculate the payback and NPV for both options. She said I should only consider the first 5 years for the NPV calculations (discount rate is 20%)

Answer 1

Factory 1

Factory 1& 2

Outflow	Inflow	Outflow	Inflow
$1.2 million	$900k	$1.2 million	$600k
	$900k	$400k	$900k
	$1.8000,000 millions		$1.8000,000 millions
	$1.8000,000 millions		$1.8000,000 millions
	$1.8000,000 millions		$1.8000,000 millions

PAYBACK PERIOD

option 1

pay back period = add inflows up to the outflow

outflow = 1.2*1,000,000= 1,200,000

first year saving is = 900,000

1,200,000- 900,000= 300,000

next year saving is = 900,000

one month saving is = 90,000/12= 75,000

to get 300,000 4 months savings is required. (300,000/75,000=4)

so payback period = 1 year and 4 months.

option 2

outflo = ( 1.2*1,000,000= 1,200,000) +(400*1000=400,000) =1600000

savings = 600000+900000= 1500000

remaining = 1600000-1500000= 100000

3rd year saving is = 1800000

one month saving is= 18000000/12= 150000

one day saving is= 150000/30= 5000

to save 100000 it is required 20 days. (100000/30=20_

so payback period = 2 years and 20 days

NPV

inflow (option 1)	present value of 20%	cash flow	inflow (option 1)	present value of 20%	cash flow
900000	0.8333	749970	600000	0.8333	416640
900000	0.6944	624960	900000	0.6944	924960
1800000	0.5787	1041660	1800000	0.5787	1041660
1800000	0.4823	868140	1800000	0.4823	868140
1800000	0.4019	723420	1800000	0.4019	723420

total

4008150

3974820

option 1

NPV= present value of cash inflow- cash outflow

= 4008150-1200000= $2808150

option 2

NPV = 3974820- (1200000+400000)= $2374820