Question

Question 2

Johnson B (Pty) Limited is considering a project that would require an initial investment of R924, 000 and would have a useful life of eight (8) years. The annual cash receipts would be R600,000 and the annual cash expenses would be R240,000. The salvage value of the assets used in the project would be R138,000. The company uses a discount rate of 15%. Additional Working Capital of R400,000 will be required for the project.

2.1 Compute the net present value of the project (10)

2.2 Compute the Payback period (3)

2.3 Would you recommend the Investment (2)

Please use the following template to assist you:

No	Transaction	Time perios	Value	Factor	PV
1	Working capital investment
2	Initial investment
3	Cash flows in
4	Cash flows out
5	Salvage value
6	Working capital recovery
7	NPV

NB: Ignore taxes for this question (thus no depreciation should be considered)

Answer 1

Computation of NPV - Johnson B Ltd
Particulars	Amount (In R)	Period	PVf@15%	Present Value (In R)
Cash Outflows:
Initial investment	924,000.00	0	1	924000
Working capital	400,000.00	0	1	400,000.00
PV of Cash outflows (A)				1,324,000.00
Cash Inflows:
Annual Net Cash Inflows (600000-240000)	360,000	1-8	4.487322	1,615,435.92
Salvage Value	138,000.00	8	0.326902	45,112.48
Recovery of Working Capital	400,000.00	8	0.326902	130,760.80
PV of Cash Inflows (B)				1,791,309.20
NPV (B-A)				467,309.20

Computation of Payback Period (in R)
Period	Cash inflow	Cumm. Cash inflow
1	360,000	360,000
2	360,000	720,000
3	360,000	1,080,000
4	360,000	1,440,000
5	360,000	1,800,000
6	360,000	3,240,000
7	360,000	3,600,000
8	898,000	4,498,000
Payback period=3+(1324000-1080000)/360000=3.77 years

As NPV of Project is Positive and payback period is also favourable therefore project will be recommended for Investment