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You have the following information about the OMI-GOSH
Annual Operating Cash Flows £
Sales Units 200,000
Contribution 2.00
Length of project 3 years
Cost of Capital 8%
Annuity 2.5771
a) Should we accept the project if investment costs are £850,000?
Years 0 1-3
Production Investment (850,000)
Operating Cash Flows 400,000
Net Cashflow (850,000) 400,000
Net Present Value - NPV Calculation
PV Discount Factor 8% 1.0000 2.5771
PV DCF (850,000) 1,030,840
NPV 180,840
or 1,030,840 400,000 x 2.5771
(850,000) less
NPV 180,840

b) How many units does OMIGOSH need to sell for the project to (still) be acceptable?
NPV = Initial Investment plus Present Value of Future Cash Flows
NPV = Investment - ((X units x £contribution) * Annuity DF)
0= (850,000) + (£2x) x 2.5771
850,000 = (£2x) x 2.5771
850,000/2.5771 = 1.50x
329828/2 = x
164,914 = x
………………………………………………………………………………………………………………………………….
Witsots wants to make a new product and estimates its annual sales and their likelihood to be as follows:
SALES NPV PROBABILITY EV(ENPV)
Best 100,000 £20,000 0.35 £7,000
Likely 90,000 £10,000 0.45 £4,500
Worst 80,000 (£15,000) 0.20 (£3,000)
£15,000 1.00 £8,500
The ENPV is:
a) £14,500
b) £15,000
c) £8,500
d) none of the above

Wutsets has a Capital Budget for the year of £14 million. No project can be undertaken in part.
Which projects should it undertake?

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