Paper 2 · investment appraisal, business ownership

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

$53,300

Also accepted: 53300, 53,300, $53300, positive $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

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