FINANCIAL MANAGEMENT STUDENT ID: [Pick the date].

FINANCIAL MANAGEMENT
STUDENT ID:
[Pick the date]

Question 1
a) With regards to determining the cash flow the following are key aspects.
 Annual depreciation expense = (2,000,000-0)/10 = $ 200,000
 Salvage value is zero
 Present value of opportunity cost owing to loss of rental over the project life is $ 300,000
 Net working capital of $ 200,000 would be invested at t=0 and recovered at t=10.
The relevant cash flows are summarized below.
b) It is known that the discount rate is 10% p.a. The computation of NPV is shown below.
Since the NPV comes out to be negative, hence the given project must not be invested in as it
would reduce the wealth of shareholders.
c) Initial investment required = $2,200,000
Amount of cash inflows during the first 6 years = $340,000*6 =$2,040,000
Amount of investment to be still recovered = 2,200,000 – 2,040,000 =$160,000
Time required in the 7th year = (160,000/340,000)= 0.47
Hence, payback period = 6+0.47 = 6.47 years
Since the payback period is higher than the stipulated 6 years, hence the given project should not
be accepted.