Question

Question 2 15 marks 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:

Answer 1

Solution 2.1:

Initial investment = R 924,000 + R400,000 = R1,324,000

Annual cash flows = R600,000 - R240,000 = R360,000

It is assumed that additional working capital will be recovered at the end of project period.

Computation of NPV - Johnson B Ltd
Particulars	Amount (In R)	Period	PV Factor	Present Value (In R)
Cash Outflows:
Initial investment	924,000.00	0	1	924,000.00
Working capital	400,000.00	0	1	400,000.00
PV of Cash outflows (A)				1,324,000.00
Cash Inflows:
Annual Cash Inflows	360,000.00	1-8	4.487322	1,615,435.74
Salvage Value	138,000.00	8	0.326902	45,112.44
Recovery of Working Capital	400,000.00	8	0.326902	130,760.71
PV of Cash Inflows (B)				1,791,308.90
NPV (B-A)				467,308.90

Solution 2.2:

Computation of Cumulative Cash Inflows
Period	Cash Inflows	Cumulative Cash Inflows
1	360,000.00	360,000.00
2	360,000.00	720,000.00
3	360,000.00	1,080,000.00
4	360,000.00	1,440,000.00
5	360,000.00	1,800,000.00
6	360,000.00	2,160,000.00
7	360,000.00	2,520,000.00
8	898,000.00	3,418,000.00

Payback period = 3 + (1324000 - 1080000) / 360000 = 3.677 years

Solution 2.3:

As NPV of project is postive and payback period is also favorable, therefore project will be recommended for investment.