Question

Q1: Carrefour is expecting its new center to generate the following cash flows:

Years	0	1	2	3	4	5
Initial Investment	($35,000,000)
Net operating cash-flow		$6,000,000	$8,000,000	$16,000,000	$20,000,000	$30,000,000

a. Determine the payback for this new center. (1 mark)

b. Determine the net present value using a cost of capital of 15 percent. Should the project be accepted?

Answer 1

A)Since the cashflows generated are uneven the payback period will be calculated by using the following formula - Years Untill Full recovery+(Unrecovered cost at the Beginning Of last Year/Cash Flow during the last year) Thee total initial investment is $35,000,000.The predicted net cash inflows over the life of the project are $6,00,000,$8,000,000,$16,000,000,$20,000,000 and $30,000,000 for years 1,2,3,4 and 5 respectively

The cash inflow fro the first 3 years would total $30,000,000($6,000,000+$8,000,000+$16,000,000) and the new center requires another $5,000,000 more to pay for itself .In year 4 the center is expected to generate $20,000,000 ,this means that for this center the payback will occur sometime between year 3 and year 4.Applying the formula we get the payback period that is 3+($5,000,000/$20,000,000) =3.25 years

B)NPV =Total Present value of future cashflows - Initial outflow

Present Value = 1/(1+r)^n , r is the cost of capital and n is the number of periods

Present Value of cash flows discounted at 15% is,

Year 1=$6,000,000*(1/1+.15)^1 =$5,217,391,Year 2 $8,000,000*(1/1+.15)^2=$6,049,120,Year 3 $16,000,000*(1/1+.15)^3=$10,520,320 Year 4 $20,000,000*(1/1+.15)^4=$11,435,000 Year 5 $30,000,000*(1/1+.15)^5=$14,915,400Total Present Vlaue of Net Cash Inflows =$5,217,391+$6,049,120+$10,520,320+$11,435,000+$14,915,400 =$48,137,231.The initial investment is $35,000,000

Substituting we get NPV = Total Present Value of future cashflows - Initial Outflow = $48,137,231-$35,000,000 =$13,137,231 . Since NPV is positive the project can be accepted