After discounting, psitive or higher NPV means that the project should be accepted; bt not those projects with negative NPV. sareholders because these techniques consider the importance of ‘time value of money’. Bsically, te use of discounted NPV and IRR can provide the shareholders with more accurate figures needed in making important business decisions. T build a completely new berth in an undeveloped area of the port. Te development including the installation of fully automatic, cmputer driven handling equipment will involve a capital outlay of £10million. Te operating the new equipment, lbour costs and other running costs for the scheme are set out below.
I is expected that the new facilities will generate an increase in the users of the port resulting in extra revenue. Te equipment is to be replaced after five years when it is expected to have a value of £700,000. Te complete facility will be closed down after the five years. T reclaim and refurbish an old unused berth. Te capital cost of this will be £4million. Te running costs for this scheme estimated to be higher than scheme 1 and the revenue will not be as high, athough it will increase.
Te cash flow for the scheme is as set out below. Te scheme has a life expectancy of six years, wth equipment being sold for £500,000 at the end of the expected life (six years) Revenue and costs have been estimated as followsPayback period aims to compute for the required time in which the company can recover the cost of investment. Bsed on scheme 1, te payback period is years in Year 1 + £2,470,000 in Year 2 + £3,210,000 in Year 3 = £8,230,000 in the first 3 years + £1,770,000 of the £5,200,000 that occurs in Year 4].
T compute for the present value of scheme 1, te available cash (annual revenue – total expenses) was multiplied with the corresponding PV factor based on 12% cost of capital. Ater adding all present value from Year 1 to Year 5, te initial investment of £10,000,000 was deducted from the total present value (£) to get the present value T compute for the present value of scheme 2, te available cash (annual revenue – total expenses) was multiplied with the corresponding PV factor based on 12% cost of capital.
Ater adding all present value from Year 1 to Year 6, te initial investment of £4,000,000 was. ..
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