Paper 2 · November 2018 · Investment Appraisal
E & K Fisheries is appraising a new branch requiring an initial investment of $300,000. The branch is forecast to generate net cash flows of $120,000 in Year 1, $130,000 in Year 2, $100,000 in Year 3 and $90,000 in Year 4. Using discount factors at 10% of 0.91, 0.83, 0.75 and 0.68 for Years 1 to 4 respectively, calculate the Net Present Value (NPV) of the branch.
Model answer
53300
Also accepted: $53300, 53 300, $53 300, positive $53 300, npv = $53 300
Explanation
Discounting each cash flow: $120,000 x 0.91 = $109,200; $130,000 x 0.83 = $107,900; $100,000 x 0.75 = $75,000; $90,000 x 0.68 = $61,200. These sum to a total present value of $353,300. Subtracting the $300,000 initial investment gives an NPV of $53,300.
Derived from ZIMSEC Business_studies Paper 2, November 2018, Q1