Question

An investor is planning to buy an asset which will cost ksh 8,000,000. The asset has a useful life of 10 years and will have a scrap value of 700,000 at the end of the tenth year. There is a 55% chance that the asset will bring in additional revenue of 15,000,000 per year and a 45% chance that the asset will bring in additional revenue of 5,000,000 per year for eight years and will incur additional costs of 900,000 per year for ten years. The machine will also require additional investment in working capital of 1,000,000 on installation. The tax rate is given as 30%. Assume that depreciation is at 20% per annum on a reducing balance method. The investors required rate of return is given as 10%:

Required

a) Determine cash flows from this project.

b) Determine the NPV of the project and give your comment.

Answer 1

present value formula	1/((1+r)^n)
where	r=rate of interest
	n=no. of years					(a)
		10%
year	PVF@ 10%,	CF	DEP	PBT	TAX@30%	AFTER TAX CASH FLOWS	PVCF
0	1	-9,000,000				-9,000,000	(9,000,000)
1	0.90909	9600000	1,600,000	8,000,000	2,400,000	7,200,000	6,545,455
2	0.82645	9600000	1,280,000	8,320,000	2,496,000	7,104,000	5,871,074
3	0.75131	9600000	1,024,000	8,576,000	2,572,800	7,027,200	5,279,639
4	0.68301	9600000	819,200	8,780,800	2,634,240	6,965,760	4,757,708
5	0.62092	9600000	655,360	8,944,640	2,683,392	6,916,608	4,294,669
6	0.56447	9600000	524,288	9,075,712	2,722,714	6,877,286	3,882,049
7	0.51316	9600000	419,430	9,180,570	2,754,171	6,845,829	3,512,993
8	0.46651	9600000	335,544	9,264,456	2,779,337	6,820,663	3,181,890
9	0.42410	0	268,435	(268,435)	(80,531)	(80,531)	(34,153)
10	0.38554	541007	214,748	326,259	97,878	443,129	170,846
b)	NPV						28,462,170

prob	rev	probrev
0.55	15000000	8250000
0.45	5000000	2250000
		10500000
	cost	900000
	PBDT	9600000

DEPRECIATION TABLE @20% DBM
YEAR	AMOUNT
	8000000
1	1600000
	6400000
2	1280000
	5120000
3	1024000
	4096000
4	819200
	3276800
5	655360
	2621440
6	524288
	2097152
7	419430.4
	1677722
8	335544.3
	1342177
9	268435.5
	1073742
10	214748.4
asset value	858993.5
Scrap value	700000
CAPITAL LOSS	158993.5