QUESTION 1:

A Company Is Considering a Capital Investment, Where the Estimated

Cash Flows Are As Follows;
YEAR CASH FIOW (GHC)
1 (90,000)
2 60,000
3 70,000
4 50,000
5 50,000
The company cost of capital of 12%.also, the capital asset could be
disposed off at the end of year 4 for a scrap value of Ghc 10,000.
Depreciation of the asset is on the straight line base for the 4 years life.
YOU ARE REQUIRED TO CALCULATE:
1. The NPV of the project and to assess whether the project should be
undertaking.
2. The payback and the discounted payback period.
3. Internal rate of return (IRR).

Solution 1:
YEAR CASH FLOW (GHC) D.F
(12%) PV
0 (90,000) 1.0000
(90,000)
1 60,000 0.8929
53,574
2 70,000 0.7972
55,804
3 50,000 0.7118
35,590
4 50,000 0.6355
31,775

NPV
86,743
NB:
WHERE D.F = DISCOUNT FACTOR
PV = PRESENT VALUE
NPV = NET PRESENT VALUE
With the positive NPV, the company should undertake the
project.
NB; year 4 cash flow is made up of scrap value of the asset to
be disposed off and the estimated year 4 cash flow ..
(GHC 10000 + 40000) =GHC 50000.

SOLUTION 2:

PAYBACK PEROID
YEAR CASH FLOW (GHC)
CUMULATIVE CASH FLOW (GHC)
0 (90,000)
(90,000)
1 60,000
(30,000)
2 70,000
40,000
3 50,000
4 50,000

payback period = 1year + 30,000

70,000

= 1.43 years.

DISCOUNTED PAYBACK PERIOD

YEAR CASH FLOW (GHC)
CUMULATIVE CASH FLOW (GHC)
0 (90,000)
(90,000)
1 53,574
(36,426)
2 55804
19,378
3 35590
4 31775

Discounted payback period = 1 year + 36426

55804

= 1.65 years.

SOLUTION 3:

IRR
USING DISCOUNTED FACTOR OF (60%)
YEAR CASH FLOW (GHC) DF (60%)
PV
0 (90,000) 1.0000
(90,000)
1 60,000 0.6250
37,500
2 70,000 0.3906
27,342
3 50,000 0.2441
12,205
4 50,000 0.1526
76,300

NPV
(5,323)
IRR = a% + NPVa * (b% -a %)
NPVa NPVb
Where a% =positive discounting factor
b% = negative discounting factor
NPVa = positive net present value
NPVb = negative net present value
Therefor;
=12% + 86743 * (60% - 12%)
86743 5323

=12% + 8674 * 48%

86743+5323

= 12% + 86743 * 48%

92066

= 12% + 0.9422 * 48% = 57.23%