Chapter 12, Problem 9E

To determine

Concept Introduction:

Concept of NPv:

Net Present Value:

The Net Present Value technique is a discounted of cash flow method, that considers the time value of money in evaluating capital investments.

The Net Present Value method uses a specified discount rate to bring all subsequent net cash inflows after the initial investment to their present values.

  $NPV=PresentvalueofNetcashinflows-Total\text{ Net initial investment}$

Company net present value and simple rate of interest.

Explanation of Solution

Calculation of Annual Cash Inflows:

  $\begin{array}{l}Sales-2,500,000\\ \text{(}-\text{)Variable expenditure }-(\underset{\_}{\text{1,000,000}})\\ \text{ Contribution }-\text{1,500,000}\\ \text{(}-\text{) Fixed expenditure }-\underset{\_}{\text{ (600,000)}}\\ EBDIT-\text{ 900,000}\\ \text{(}-\text{) Depreciation }-\underset{\_}{\text{ (600,000}})\\ EBIT-\text{ 300,000}\\ \text{(}-\text{) Tax }-\underset{\_}{}\underset{\_}{\text{ 0}}\\ PAT-\text{ 300,000}\\ \text{(+) Depreciation }-\underset{\_}{\text{ 600,000}}\\ CashInflows-\underset{\_}{\text{900,000}}\\ \end{array}$

Year	CIF	DF@15%	DCFAT
1	180,000	0.896	161,280
2	180,000	0.756	136,080
3	180,000	0.658	118,440
4	180,000	0.572	102,960
5	180,000	0.497	89,460
		PVCIF	608,220

  $\begin{array}{l}ThereforeNPv=PVCIF-PVCOF\hfill \\ =608,220-300,000\hfill \\ =308,220\hfill \end{array}$

Simple rate of return:

  $\begin{array}{l}ARR/SRR=\frac{\text{Average Profit After Tax}}{\text{Net Initial Investment}}\\ =\frac{\frac{300,000}{5}}{\frac{300,000}{2}}\times \text{100}\\ =\frac{60,000}{150,000}\times \text{100}\\ =\text{40\% }\end{array}$