Question

Question1

1.1Complete the table

Tracey started a business. During the first month the following transactions occurred.

1. She opened a bank account for the business and deposited a cheque for the amount of R950 000.
2. The business bought a property R450 000 (R250 000 loan and cash R200 000).
3. Business bought stock for R120 000 cash.
4. Stock was sold for R100 000 cash, which cost R60 000.
5. Business is owing Telkom R24 000.

Example: Bought a truck for R200 000 cash

+ 200K (Non-current asset or NCA) and -200K Bank : You are required to show the signs.

	Assets   =	Owner’s equity     +	Liabilities
1
2
3
4
5
Total

1.2 Nayika Ltd is in the process of analysing a project which they call Project Extend. The relevant cash flows for the project are shown in the table below. Nayika’s cost of capital is 13%. Complete the table and show basic workings after the questions

Project Extend		Factor	PV amount
Initial Investment	R1000 000
Year	Cash Inflows(Rands)
1	180 000
2	200 000
3	380 000
4	490 000
5	250 000
Total

1. Calculate the project payback period.(in years and months)                                                 
2. Calculate the net present value (NPV) of the project   .
3. Explain whether the project should be accepted?

Answer 1

Q1

S.no	Assets =	+Owners equity	Liabilities
1	+950,000 (Bank)	+950,000
2	+450,000( NCA) and -200,000 cash		+250,000 loan
3	+120,000 (stock) and -120,000 cash
4	-60,000(stock) and +100,000 cash	+40,000(Profit)
5		-24,000	+24,000 (outstanding liability)
Total	1,240,000	966,000	274,000

Total assets = Owner's equity + liabilities

1,240,000 = 966,000 + 274,000

Explanation

1 - Owner opened a bank account for the business - Asset increased, Owners equity increased

2 - Bought a property for cash and loan - Asset increased by equipment value and decreased by cash spent, Liability increased by the loan amount

3 - Stock bought for cash - Asset increased and decreased by the same amount

4 - Stock was sold for more than its cost for cash - Asset decreased by stock vale and increased by the cash received, owners equity increased by the profit earned

5 - Business owed - Outstanding payable - liability increased, Owners equity decresed by the same amount

Q2

a) Calculate the project payback period.(in years and months)

Year	Net cash flow Inflow	Cumulative cash inflows
1	+180,000	180,000
2	+200,000	380,000
3	+380,000	760,000
4	+490,000	1,250,000
5	+250,000	1,500,000

Payback period = 3 years + (240,000 / 490,000) (1000,000 - 760,000 = 240,000 )

= 3 + 0.49 OR 3.5 years

= 3 years 6 months

b) Calculate the net present value (NPV) of the project?

Expected cashflows = $180,000 will be received at the end of the first year, $200,000 at the end of the second year, $380,000 at the end of the third year, $490,000 at the end of the fourth year, and $250,000 at the end of the fifth year. Let’s find the present value of the cash flow stream if the discount rate is 13%

The present value of the first cash flow (CF1) amounts to $159,292, CF2 is $156,629, CF3 is $263,359, CF4 is $300,526, and CF5 is $135,690.

PV of CF₁ = $180,000 ÷ (1 + 0.13)¹ = $159,292

PV of CF₂ = $200,000 ÷ (1 + 0.13)² = $156,629

PV of CF₃ = $380,000 ÷ (1 + 0.13)³ = $263,359

PV of CF₄ = $490,000 ÷ (1 + 0.13)⁴ = $300,526

PV of CF₅ = $250,000 ÷ (1 + 0.13)⁵ = $135,690

Thus, the present value of the uneven cash flow stream will be $1,015,496.

Net present value = Present value of cash inflows - initial invesment

= $1,015,496 - $1,000,000

=$15,496

C)  The project should be accepted as it has a smaller payback period of 3.5 years which is less than the project overall life of 5 years and a positive net present value of $15,496.