Question 5Cando Ltd is confident that the investment in a new automated and ener

Question

Question 5Cando Ltd is confident that the investment in a new automated and energy-efficientmachine (project Jafa) will result in an increase in sales revenue of R20 million in thefirst year, R29 million in the second year and R10 million in the third year. Operatingcosts will amount to 70% of sales revenue and the company is required to make aninvestment in working capital of R6 million at the beginning of the project, which isrecoverable at the end of the 3-year life of the project. The cost of the project is R18million and the residual value will be R11 million.The required rate of return is 14%. Assume no taxation.

5.1 Calculate the Net Present Value of project Jafa.

5.2 Determine the Internal Rate of Return of project Jafa.

5.3 Briefly evaluate the viability of project Jafa

Explanation / Answer

As the Project has a postive NPV project is acceptable

0 1 2 3 Cost of the project -18000000 Working Capital -6000000 6000000 OCF =Sales*(1-70%) 6000000 8700000 3000000 Residual value 11000000 Net Cash Flow -24000000 6000000 8700000 20000000 PV factor 14% 1.0000 0.8772 0.7695 0.6750 Present Value -24000000 5,263,157.89 6,694,367.50 13499430.32 NPV 1,456,955.72 IRR Uisng Excel IRR funtion 16.94%

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