Question

If EH Logistics sticks to labour to handle packages then:

•  It can pack 600,000 units in year 1 and this number will likely to go up by 120% in year 2, 10% in year 3 and 3.31% in year 4 compared to the previous years. It is expected to remain constant after that. The Same Value not same Rate

•  The packages are priced at $2 per package.

•  The company has invested $900,000 in buildings in the current year. The buildings will be used for handling the packages. The buildings are fully furnished and have good facilities for people to work comfortably.

•  EH Logistics estimated that the fixed cost for this arrangement is going to be $260,000 in the first year, which includes set-up cost of $50,000.

•  Thereafter, the fixed cost would be $210,000.

•  The variable cost per package is $1.40.

•  The buildings are fully depreciated in 15 years (at an annual rate of $60,000) for tax purposes. However, the salvage value of the buildings is $285,000.

•  There will be a further increase in net working capital of $140,000, $14,000, $15000, $17000 and $20,000 for year 1, 2, 3, 4 and year 5 to year 15.

•  The tax rate is 30%.

•  The opportunity cost of capital for this project is 10%.

•  There is no recovery of working capital.

Calculate NPV and IRR

Answer 1

Based on the given data, pls find below the tables for workings on the Free Cash flows, NPV and IRR;

Assumption:

Sales in Year 2: It is mentioned that the no. of units in Year 2 shall increase by 120% over Year 1; Hence, have considered the increase as 120% over the Year 1; 600000+(600000)*120% = 1320000 units;

If suppose, the assumption is incorrect, then pls find below:

Assumption:

Sales in Year 2: It is mentioned that the no. of units in Year 2 shall increase to 120% over Year 1; Hence, have considered the increase as 120% over the Year 1; (600000)*120% = 720000 units;

Computation:

Computation of IRR: This can be computed using formula in Excel = IRR("range of cashflows", discounting factor%);

Computation of Net Present Value (NPV) based on the Discounted Cash flows; The Discounting factor is computed based on the formula: For year 0, the discounting factor is 1; For Year 1, it is computed as = Year 0 factor /(1+discounting factor%) ; Year 2 = Year 1 factor/(1+discounting factor %) and so on;

Next, the cashflows need to be multiplied with the respective years' discounting factor, to arrive at the discounting cash flows;

The total of all the discounted cash flows is equal to its respective Project NPV of the Cash Flows;