question archive Section A) Compulsory Question 1
Section A) Compulsory Question 1
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Section A) Compulsory Question 1. A&G Ltd. is a housing company, intending to undertake a new project, required $255,460 of initial investment. The cost of capital for this project is estimated at 11% per annum. A consultant of A&G Ltd. has come up with the following cash flow projections: Cash flows/Years 2021 2022 2023 2024 2025 2026 Cash inflows ({) 68,540 82,920 120,360 180,560 210,450 260,460 Cash outflows () 72,650 98,470 90,250 95,780 100,350 105,780 As the Finance Director of A&G Ltd., you are required to: a) Appraise the proposed project using the Net Present Value (NPV) technique [30 Marks] b) Make recommendations to the management of A&G Ltd. [5 Marks] c) Discuss the advantages and disadvantages of the NPV technique. [5 Marks] Total [40 Marks]
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(a) NPV = -45,885.78
(b) The project should not be accepted because its NPV is negative.
(c) Advantage of NPV :-
- It considers the time value of money.
- It tells whether the investment will increase firm's value or not.
Disadvantage of NPV :-
- It ignores the hidden cost like opportunity cost.
- NPV technique is not useful to compare different size projects.
Step-by-step explanation
(a) Net present value :-NPV - Project A Years Cash inflow Cash outflow Cash flow PVF @ 11% PV a b c=a - b d cxd 0 0 255460 255460 1 -255460.00 1 68540 72650 -4110 0.9009 -3702.70 2 82920 98470 -15550 0.8116 -12620.38 3 120360 90250 30110 0.7312 22016.43 4 180560 95780 84780 0.6587 55844.59 5 210450 100350 110100 0.5935 65344.35 6 260460 105780 154680 0.5346 82691.93 NPV -45885.78
Please see attached file
