CASE STUDY FINANCIAL VIABILITY INDICATORS Kulula Ltd has been incorporated as an
ID: 2328718 • Letter: C
Question
CASE STUDY FINANCIAL VIABILITY INDICATORS
Kulula Ltd has been incorporated as an investment advisory company. The company sources for consulting services in investment appraisal and company valuation. You have recently joined the company as an investment analyst. You have been assigned to conduct an investment appraisal of two projects that a client is considering investing in. The two projects are tomato growing using drip irrigation and the second project is keeping layers for egg production. The initial investment required for each project is ZMW 15,000,000 to be invested in plant and machinery. The two projects are mutually exclusive meaning that only one can be undertaken and not both.
The client has indicated that they can only accept an investment that meets at least the following conditions:
Payback period of not more than 2 years.
Internal rate of return greater than 50%
Details of the project cash flows and other information are as follows:
Cash flows:
Project
Tomato Growing
Project
Chicken Layers
Year
ZMW'000
Year
ZMW'000
Outlay Year 0
(15,000)
Outlay Year 0
(15,000)
1
6,000
1
6,000
2
5,000
2
9,000
3
11,000
3
12,000
4
15,000
4
15,000
5
20,000
5
9,000
Depreciation Policy
The depreciation policy for the plant and machinery is straight line over 5 years with no residual value.
Cost of Capital
The weighted average cost of capital is 25%.
Required:
Using Microsoft Excel, you are required to:
Calculate the following financial viability indicators for each project:
a) Normal payback period
10 marks
b) Dynamic payback period
10 marks
c) Net Present
10 marks
d) Profitability index or Net Present Value Ratio
5 marks
e) Internal Rate of return
10 marks
f) Accounting rate of return
10 marks
Prepare a report to the client with a recommendation as to which of the two projects you recommend that the client undertakes with justification. 15 marks
Total marks = 70 marks
Project
Tomato Growing
Project
Chicken Layers
Year
ZMW'000
Year
ZMW'000
Outlay Year 0
(15,000)
Outlay Year 0
(15,000)
1
6,000
1
6,000
2
5,000
2
9,000
3
11,000
3
12,000
4
15,000
4
15,000
5
20,000
5
9,000
Explanation / Answer
Tomato Growing Chicken layers Year Annual Cash flow Cumlative cash flow Annual Cash flow Cumlative cash flow 1 60,00,000.00 60,00,000.00 60,00,000.00 60,00,000.00 2 50,00,000.00 1,10,00,000.00 90,00,000.00 1,50,00,000.00 3 1,10,00,000.00 2,20,00,000.00 1,20,00,000.00 2,70,00,000.00 4 1,50,00,000.00 3,70,00,000.00 1,50,00,000.00 4,20,00,000.00 5 2,00,00,000.00 5,70,00,000.00 50,00,000.00 4,70,00,000.00 Pay back period 2 years 4 months Pay back period 2 years
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