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In: Finance

Plastech Inc. is operating its business in Oman for many years. They are manufacturers and suppliers...

Plastech Inc. is operating its business in Oman for many years. They are manufacturers and suppliers of different plastic articles. They are now planning to open up a web store through which, people will be able to order online and receive their goods. This online business will however require initial investment for developing the system and hiring new staff for receiving orders and delivery. This initial investment is estimated to be OMR 160,000. Information on the expected additional revenues and costs (salaries of staff, website administration etc) for next 6 years is given below:

Year Ending

Expected revenue

(OMR)

Expected Annual Costs (OMR)

2020

56,000

4,200

2021

61,000

5,400

2022

68,000

6,000

2023

74,000

6,800

2024

86,000

8,000

2025

98,000

12,800

2026

102,000

14,500

Assuming that annual interest rate is 8% per annum and compounded annually.

a) Draw a cash flow diagram, based on the scenario given.

b) Calculate the NPW of all the future cash flows, as given above.

c) Calculate the FW at the end of year 2026 of the given cash flows.

Solutions

Expert Solution

Year Revenue Cost Profit Interest Net profit if discounted at 8% PV PV of before interest
2020 56000 4200 51800 12800 39000 0.925925926 36111.11 47962.96296
2021 61000 5400 55600 13824 41776 0.85733882 35816.19 47668.03841
2022 68000 6000 62000 14929.92 47070.08 0.793832241 37365.75 49217.59894
2023 74000 6800 67200 16124.31 51075.69 0.735029853 37542.15 49394.00611
2024 86000 8000 78000 17414.26 60585.74 0.680583197 41233.64 53085.48937
2025 98000 12800 85200 18807.4 66392.6 0.630169627 41838.6 53690.45221
2026 102000 14500 87500 20311.99 67188.01 0.583490395 39203.56 51055.40959
487300 373088.1 269111 352073.9576

Interest calculation

opening balance Interest 8% Closing balance
2020 160000 12800 172800
2021 172800 13824 186624
2022 186624 14929.92 201553.92
2023 201553.92 16124.3136 217678.2336
2024 217678.2336 17414.25869 235092.4923
2025 235092.4923 18807.39938 253899.8917
2026 253899.8917 20311.99133 274211.883

jeff jeffy answered 1 year ago
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