INVESTMENT APPRAISAL AND ANALYSIS

IDE 2018 ASSIGNMENT 2

QUESTION 1
Undiscounted Payback = Initial Investment/Equal cash flows
NPV = Total Present Value – Initial Investment

Year Cashflows Present Value Factor Present Value

1 60,000 0.909 54,545.45
2 60,000 0.826 49,586.78
3 60,000 0.751 45,078.89
4 60,000 0.683 40,980.81
5 60,000 0.621 37,255.28

75 000 = 227 447.21 – Initial Investment

Initial Investment = 152 447.21
Undiscounted Payback = 152 447.21/60 000
Undiscounted Payback = 2.54 years

QUESTION 2
To decide which variable the NPV is particularly sensitive to we calculate the sensitivity of each
variable
Year 1 2 3
Volume 20,000.00 30,000.00 30,000.00
Price/unit 60.00 60.00 60.00
Sales Revenue 1,200,000.00 1,800,000.00 1,800,000.00
Cost/unit 40.00 40.00 40.00
Total Cost 800,000.00 1,200,000.00 1,200,000.00
Net Cashflow 400,000.00 600,000.00 600,000.00
PV Factor 0.91 0.83 0.75
Present Value 363,636.36 495,867.77 450,788.88
Total PV 1,310,293.01
Initial Investment 100,000.00
Year Disc Factor (10%) PV of Variable Cost PV of Cashflow Present Value NCF
0 1 -100000
1 0.909 (727,272.73) 1,090,909.09 363,636.36
2 0.826 (991,735.54) 1,487,603.31 495,867.77
3 0.751 (901,577.76) 1,352,366.64 450,788.88
TOTAL (2,620,586.03) 3,930,879.04 1,210,293.01
a) Sales price\unit
Sensitivity =1 210 293.01\3 930 879.04
Sensitivity = 31%

b) Unit Cost
Sensitivity =1 210 293.01\2 620 586.03
Sensitivity = 46%

c) Sales Volume
Sensitivity =1 210 293.01\(3 930 879.04 – 2 620 586.03)
Sensitivity = 92%

QUESTION 3
When depreciation is considered

Year 0 1 2 3 4
Revenue 3,000 4,000 5,000 2,000
Operating costs (750) (1,000) (1,250) (500)
Depreciation 3,750 3,750 3,750 3,750
Net cashflows (15,000.00) 6,001 6,752 7,503 5,254
Disc Factor(10%) 1.000 0.909 0.826 0.751 0.683
Present Value (15,000.00) 5,455.45 5,580.17 5,637.11 3,588.55
NPV 5,261.29
When depreciation is not considered

Year 0 1 2 3 4
Revenue 3,000 4,000 5,000 2,000
Operating costs 750 1,000 1,250 500
Net cashflows - 15,000.00 2,250 3,000 3,750 1,500
Disc Factor(10%) 1.000 0.909 0.826 0.751 0.683
Present Value - 15,000.00 2,045.45 2,479.34 2,817.43 1,024.52
NPV - 6,633.26

b) Calculate IRR
When depreciation in considered part of the cost
When r = 12%

Year 0 1 2 3 4
Revenue 3,000 4,000 5,000 2,000
Operating costs (750) (1,000) (1,250) (500)
Depreciation 3,750 3,750 3,750 3,750
Net cashflows - 15,000.00 6,001 6,752 7,503 5,254
Disc Factor(12%) 1.000 0.893 0.797 0.712 0.636
Present Value - 15,000.00 5,358.04 5,382.65 5,340.49 3,339.01
NPV 4,420.19

If r = 25.433%

Year 0 1 2 3 4
Revenue 3,000 4,000 5,000 2,000
Operating costs (750) (1,000) (1,250) (500)
Depreciation 3,750 3,750 3,750 3,750
Net cashflows - 15,000.00 6,001 6,752 7,503 5,254
Disc Factor(25.433%%) 1.000 0.797 0.636 0.507 0.404
Present Value - 15,000.00 4,784.23 4,291.50 3,801.89 2,122.48
NPV 0.09

IRR = 25.433% the discount rate that gives NPV = 0

if depreciation is not considered as part of the cost
When r = 12%

Year 0 1 2 3 4
Revenue 3,000 4,000 5,000 2,000
Operating costs 750 1,000 1,250 500
Net cashflows - 15,000.00 2,250 3,000 3,750 1,500
Disc Factor(12%) 1.000 0.893 0.797 0.712 0.636
Present Value - 15,000.00 2,008.93 2,391.58 2,669.18 953.28
NPV - 6,977.04

When r = 13.311%

Year 0 1 2 3 4
Revenue 3,000 4,000 5,000 2,000
Operating costs 750 1,000 1,250 500
Net cashflows - 15,000.00 2,250 3,000 3,750 1,500
Disc Factor(-13.311%) 1.000 1.133 1.284 1.455 1.648
Present Value - 15,000.00 2,549.50 3,851.81 5,455.66 2,472.75
NPV - 670.28

IRR = -13.311%