The following are the various calculations:
|
(Amounts in $ in billions) |
|||||||||||||
|
Particulars |
1988 |
1989 |
1990 |
1991 |
1992 |
1993 |
1994 |
1995 |
1996 |
1997 |
1998 |
1999 |
2000 |
|
Cash inflows: |
|||||||||||||
|
Revenue |
11.20 |
11.87 |
12.58 |
13.34 |
14.14 |
14.99 |
15.89 |
16.84 |
17.85 |
18.92 |
20.06 |
21.26 |
|
|
7.56 |
8.09 |
8.66 |
9.26 |
9.91 |
10.60 |
11.35 |
12.14 |
12.99 |
13.90 |
14.87 |
15.91 |
||
|
Less: cost of goods sold |
8.73 |
9.12 |
9.53 |
9.96 |
10.41 |
10.88 |
11.37 |
11.88 |
12.41 |
12.97 |
13.56 |
14.17 |
|
|
5.10 |
5.36 |
5.63 |
5.92 |
6.22 |
6.54 |
6.87 |
7.22 |
7.59 |
7.98 |
8.39 |
8.81 |
||
|
Gross profit |
4.93 |
5.48 |
6.07 |
6.72 |
7.42 |
8.17 |
8.99 |
9.88 |
10.83 |
11.87 |
12.98 |
14.19 |
|
|
Less: depreciation |
0.81 |
0.81 |
0.81 |
0.81 |
0.81 |
0.81 |
0.81 |
0.81 |
0.81 |
0.81 |
0.81 |
0.81 |
|
|
Net profit |
4.12 |
4.67 |
5.26 |
5.91 |
6.61 |
7.36 |
8.18 |
9.07 |
10.02 |
11.06 |
12.17 |
13.38 |
|
|
Less: taxes @ 32% |
1.32 |
1.49 |
1.68 |
1.89 |
2.11 |
2.36 |
2.62 |
2.90 |
3.21 |
3.54 |
3.90 |
4.28 |
|
|
Earnings after taxes |
2.80 |
3.17 |
3.58 |
4.02 |
4.49 |
5.01 |
5.56 |
6.16 |
6.82 |
7.52 |
8.28 |
9.10 |
|
|
Additional working capital |
150.00 |
||||||||||||
|
Additional working capital |
2.61 |
||||||||||||
|
Total cash inflow |
2.80 |
3.17 |
3.58 |
4.02 |
4.49 |
5.01 |
5.56 |
6.16 |
6.82 |
7.52 |
8.28 |
161.71 |
|
|
Cash outflows: |
|||||||||||||
|
Initial investment |
24.00 |
||||||||||||
|
Working capital |
150.00 |
||||||||||||
|
Capital expenditure |
1.70 |
1.40 |
1.30 |
0.93 |
0.74 |
0.74 |
0.74 |
0.74 |
0.74 |
0.74 |
0.74 |
0.74 |
|
|
Additional capital expenditure |
0.16 |
0.17 |
0.17 |
0.20 |
0.21 |
0.22 |
0.22 |
0.23 |
0.24 |
0.25 |
0.26 |
0.27 |
|
|
Total cash outflow |
174.00 |
1.86 |
1.57 |
1.47 |
1.13 |
0.94 |
0.95 |
0.96 |
0.97 |
0.98 |
0.99 |
1.00 |
1.01 |
|
Total cash inflow/(outflow) |
-174.00 |
0.94 |
1.61 |
2.11 |
2.89 |
3.55 |
4.05 |
4.60 |
5.20 |
5.84 |
6.53 |
7.28 |
160.70 |
|
PV factor |
1.00 |
0.87 |
0.75 |
0.66 |
0.57 |
0.50 |
0.43 |
0.37 |
0.87 |
0.87 |
0.75 |
0.66 |
0.57 |
|
Net present value |
-174.00 |
0.82 |
1.21 |
1.38 |
1.64 |
1.76 |
1.74 |
1.72 |
4.51 |
5.07 |
4.93 |
4.77 |
91.56 |
|
-52.86 |
|||||||||||||
|
Internal rate of return |
-0.03 |
Conclusion:
From the above stated analysis, it can be stated that the project must not be accepted since the net present value from the project is negative. This merely means that the outflow from the project would be more than the inflow and hence, the project must not be accepted. Also, the internal rate of return derived from the project is negative, hence, the project must not be accepted.
The net present value helps in comparing the amounts that have been invested in the project with the present values of all of the future cash receipts from the investment.
The following are its advantages and disadvantages:
- It is a direct measure of the investment made by the stockholders
- But with the IRR method, it shows the return that the stockholders receives on their investment.
- The size of the project is not capable of being measured
- But with the method of IRR, the sometimes gives the conflicting answers when the same is compared with the net present value method (Small business chron, 2017).
This is the rate of the return that is used for the purposes of measuring the profitability of all of the potential investments. This is the rate of discount that makes the net present value of all of the cash flows from one particular project to equal to 0. This means that the calculations could be relied on using the same formula as the concept of net present value does (E finance management, 2017).
The following are the advantages and disadvantages of the same:
- It uses the time value of money theory
- All of the cash flows are important
The following are the disadvantages of the same:
- It is difficult to be understood
- It undertakes some of the unrealistic assumptions (SV tuition, 2017).
References:
Bornholt, G. (2017). Advantages and Disadvantages of Internal Rate of Return (IRR). [online] eFinanceManagement. Available at: https://efinancemanagement.com/investment-decisions/advantages-and-disadvantages-of-internal-rate-of-return-irr [Accessed 5 May 2017].
Kumar, V. (2017). Advantages and Disadvantages of Internal Rate of Return. [online] Svtuition.org. Available at: https://www.svtuition.org/2010/05/advantages-and-disadvantages-of.html [Accessed 5 May 2017].
Smallbusiness.chron.com. (2017). Advantages & Disadvantages of Net Present Value in Project Selection. [online] Available at: https://smallbusiness.chron.com/advantages-disadvantages-net-present-value-project-selection-54753.html [Accessed 5 May 2017].
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