Question
In: Finance
Griffith Motors is planning to open a new factory. The initial outlay of this project is...
Griffith Motors is planning to open a new factory. The initial outlay of this project is 70 million AUD, and the company expects the factory to earn revenues of 80 million AUD in Year 1, 90 million AUD in Year 2. The operating costs are expected to be 40 million AUD each year. The company is planning to sell the factory at the end of Year 2 and the company is expecting the salvage value of the project is 15 million AUD. If the project’s discount rate is 7%, should the company go ahead with the project (hint: NPV). Provide all the workings and justify your answer (use up to 3 decimal places).
Solutions
Expert Solution
NPV means Net Present Value
NPV = PV of Cash Inflows - PV of Cash Outflows
If NPV > 0 , Project can be accepted
NPV = 0 , Indifference point. Project can be accepted/
Rejected.
NPV < 0 , Project will be rejected.
| Year | Particulars | CF | PVF @7 % | Disc CF |
| 0 | Initial Outlay | $ -70.000 | 1.000 | $ -70.000 |
| 1 | Year 1 Revenues(80) - Year 1 Operation Expenses (40) | $ 40.000 | 0.935 | $ 37.383 |
| 2 | Year 2 Revenues(90) - Year 2 Operation Expenses (40) | $ 50.000 | 0.873 | $ 43.672 |
| 2 | Salvage Value | $ 15.000 | 0.873 | $ 13.102 |
| NPV | $ 24.157 |
Since NPV of the project is +Ve the project should be accepted.
PV factor for year 1 = 1/(1.07)^1
PV factor for yar 2 = 1/(1.07)^2
Please let me know if you need any further assitance
jeff jeffy answered 1 year agoRelated Solutions
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