Frozen LTD Project Evaluation Question 2022

FROZEN LTD
QUESTION ONE
PROJECT EVALUATION
Qn1 .calculate the initial investment of the new machine.
$
machine cost
$
42,000.00
+ installation cost
$
3,000.00
+ changes in NWC
$
75,600.00
initial
investment
$
120,600.00
Qn 2. Calculate the annual operating net inflows for the project
sales
$
540,000.00
$
680,000.00
$
575,000.0
0
$
450,000.00
$
410,000.00
variable expense
$
189,000.00
$
238,000.00
$
201,250.0
0
$
157,500.00
$
143,500.00
contribution
margin
$
351,000.0
0
$
442,000.00
$
373,750.
00
$
292,500.00
$
266,500.00
less
expens
es fixed cost 250000 250000 250000 250000 250000
annual net
cashinflow
$
101,000.00
$
192,000.00
$
123,750.0
0
$
42,500.00
$
16,500.00
Or the annual net cash inflow can also be computed by adding back
depreciation to the net operating income.
total operating
income
$
92,000.00
$
183,000.00
$
114,750.00
$
33,500.00
$
7,500.00
add;
non cash deduction
for dep
$
9,000.00
$
9,000.00
$
9,000.00
$
9,000.00
$
9,000.00
annual net cash $ $ $ $ $

inflow 101,000.00 192,000.00 123,750.00 42,500.00
16,500.0
0
Qn 3 calculate the annual change in the net working capital throughout the
life of the project.
$
540,000.00
$
680,000.00
$
575,000.00
$
450,000.0
0
$
410,000.00
networking capital
changes
$
75,600.00
$
95,200.00
$
80,500.00
$
63,000.00 -
14% 14% 14% 14% 14%
Qn 4 determine the terminal cashflow of the project.
terminal year value
incremental cashflow
$
16,500.00
+ salvage value
$
-
- depreciation
$
9,000.00
+ nWC
$
-
terminal year value
$
7,500.00
Qn 5 Determine the projects relevant cash flows and plot them on a chart
with appropriate headings and lables.

2020 2021 2022 2023 2024
$-
$1,00,000.00
$2,00,000.00
$3,00,000.00
$4,00,000.00
$5,00,000.00
$6,00,000.00
$7,00,000.00
$8,00,000.00
cashflow chart
sales contribution margin
annual net cashinflow
Looking at the project cashflow projection between the year 2020 and 2024
it show a slight deep in the sales from 2021 where the business experienced
a boom on its sales revenue. However, the other subsequent years
experienced gradual lows over the period
Qn 6. Appraisal techniques
Payback period.
payback period 1
$
32,462.4
0
0.169075
1.169075y
ears
The investment takes 1.169 years to realize the preliminary investment
amounts and enough cash inflows to break even and recoup the outlay of
cash needed to initiate the project a survey done by Graham and Harvey
(2001) show that at least 56.7% of the Chief Financial Officers use the simple
payback method as an investment appraisal technique , though much used it
should be noted that the simple period payback is not achievable . it
calculates an imaginary payback period , and shows when the projects will
realize the initial investment.
Net present value
12% factor
cost of new equipment $