Calculation of NPV of Projects

FINANCIAL FOR
BUSINESS DECISION
MAKING

Table of Contents
INTRODUCTION...........................................................................................................................1
Calculation of NPV of projects...................................................................................................2
Outcomes form the analysis........................................................................................................5
CONCLUSION................................................................................................................................6
REFERENCES................................................................................................................................7

INTRODUCTION
Financial information are considered important for financial decision making and
planning. It remain helpful for finance consultants and accountants to consolidate and correlate
the functions of business and functions of business with appropriate business decision making.
Lochside Liquors Limited (LLL) is a manufacturing organisation that sells premium Scotch
whisky under the brand name of “Highland Princess”. Management committee of this
organisation is seeking for business expansion plan for business which is to analyse with the
capital budgeting methods and streams. Overall case scenario is evaluated by implementing
investment appraisal techniques like NPV, IRR. Feasibility of investment projects evaluated with
peer comparison among available investment options.
Summary of the question
Chairman of Lochside Liquors Limited (LLL) is organised a meeting with its director
term members regarding proposed capital investment plan for expansion of business. The capital
expenditure budget is limited up to £500,000 which can not be exceed form the above limit.
Organisation has two business projects subject to expand Scotch Whisky Market in South Asia
and The Far East. One project is Whisky based liqueur to Drambuie and second project is a new
cheaper variety of Whisky made form rye.
Requirements for the projects
1. 50000 Sq. ft of space
2. An option of leasing out the section for £25000 a year to save the cost of building a new
shed.
3. Rend of the area will be £30000 (based upon 150000 sq. ft. for £90000 for a year)
4. Additional cost of renovating the section for a new project - £20000
5. Plant cost for Liqueur project as £140000 plus £20000 for shipping and installation
6. Plant cost for Rye project is £250000 plus £50000 of shipping and installation.
7. No salvage value for liqueur plant is Nil after five year whereas salvage value for
£40000 after five year.
8. Creditors will be increased by £10000, debtors will be increased by £5000 every year.
9. Contribution form Existing business is £4 contribution per bottle.
10. It is expected that the Highland princess sales will be reduced by 30000 bottles per
annum.
1