Question

Alicaca Ltd is considering an investment in an expansion regarding development of a new product to be sold in the existing market. The proposed project requires an initial investment of new machinery and equipment costing $4,000,000 using the straight-line method as its depreciation policy. In addition, initial working capital investment requires $400,000. The cost of capital applicable to the company in making investment decisions is 10%.

In preparing capital budgeting analysis, the finance director has provided the following estimated net cash inflows for the 4-year period together with the relevant notes for the new investment:

	Net Cash Inflows
Year 1	800,000
Year 2	1,000,000
Year 3	1,500,000
Year 4	1,800,000

• The project life of the new product line is estimated at 4 years.
• The net cash flows generated will be received in lump sum at the end of each year.
• The working capital can be released as cash flows at the end of the project.
• The salvage value of machinery and equipment at the end of the product line's life is expected to be $300,000.
• It is assumed that there would not be any income tax arising from the investment.

Required:

For the purpose of discussions in the next board meeting, the finance director has requested you to evaluate the attractiveness of the investment by providing calculations of the following project indicators (all figures are rounded to the nearest $1):

1. Net present value (NPV)                                                                                                 
2. Profitability index (PI)                                                                                       
3. Payback period (PBP)                                                                                         
4. Accounting rate of return (ARR) based on initial investment                       

Answer 1

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