Question

(a)An initial investment of Ghc 2,900,000 in a project produces cash inflows of Ghc750,000,
Ghc 750,000, Ghc 900,000, Ghc 900,000, Ghc 595,000 at 12 month intervals. The cost of
capital to finance the project is 12%.
You are required to decide whether the project is worthwhile using:
i) The Net Present Value
ii) The Internal Rate of Return

(b) The following information relate to a project just about to be launched:
Project expected life 5 years
Project outlay GH120,000
Expected profits after tax but before depreciation are:
Year Profits
GH¢
1 20,000
2 60,000
3 30,000
2
4 25,000
5 4,000
Required
Estimate the payback period of the project

Answer 1

a)

The cash flows associated with the project is shown in the following table

The net present value is calculated as follows

Net present value = Ghc - 82274.26

The internal rate of return is the discount rate that makes the present value of cash inflows equal to initial investment.

In the above equation, the value of r is the internal rate of return. The value of r is found using trial and error method

Let r = 10%

The present value of cash inflows = 2961996.51 ( higher than initial investment)

Let r = 11%

The present value of cash inflows = 2888426.161 ( lesser than initial investment)

IRR is between 10% and 11%

IRR = 10.84%

Based on the net present value and Internal rate of return analysis, the project is not worthwhile because the NPV is negative and IRR is less than the cost of capital.

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b)

The payback period of the project is calculated as follows

Payback period of the project = 3.4 years