Financial management - Assignment Example

Present value of the expected cash flows is computed by discounting them at the required rate of return (also called minimum rate of return); a zero NPV means the project repays original investment plus the required rate of return. A positive NPV means a better return, and a negative NPV means a worse return, than the return from zero NPV. It is one of the two discounted cash flow (DCF) techniques (the other is internal rate of return) used in comparative appraisal of investment proposals where the flow of income varies over time”. . The incremental costs remain the same throughout the five years.

Depreciation is added back because it is a non-cash item; it is only deducted earlier to calculate the tax. It is assumed that tax is paid in the year in which it is accrued. Workings Direct Costs Yr 1 – $950,000(Sales in Year 1) * 55% = $522,500 Yr 2 onwards – $1,500,000 (Sales in Year 2 and onwards) * 55% = $825,000 Depreciation Depreciation for the five years on straight line basis = $1,000,000 ? 5 = $200,000 Conclusion Based on the fact that the project generates a positive Net Present Value of $397500, the project would have beneficial prospects for the company.

Hence, the project should be undertaken. References Top of Form Bpp Learning Media. (2009). Acca - F9 Financial Management: I-learn. Gardners Books. BusinessDictionary.com, Net Present value, Definition. http://www.businessdictionary.com/definition/net-present-value-NPV.html Bottom of