Heavenly Foods Answers

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Question 6 The net investment in Year 0 is Equipment cost $700,000 Freight 35,000 Installation 70,000 Change in NWC 30,000 Total $835,000 Non operating cash flow in year 4 is Salvage value $87,500 SV tax -35,000 Recovery of NWC 30,000 Termination CF 82,500 Question 7 The figures are below NPV $5,021 IRR 12.3% MIRR 12.2% ARR 14.9% Payback 3.05 years (The figures are from the attached file with Cell C38 and C39 set to zero – no inflation effects are considered) The payback is slightly higher than 2.5 years. But all other indicators point towards acceptance of the project. Question 8 a. The problem is that the NPV would be lower. The cash flows are in real terms (and so do not increase) while the discounting is at nominal rate (which is higher due to inflation consideration). Thus it if the NPV turns out to be negative, the project may not be undertaken, which would not be correct since real cash flows are discounted at nominal rate. b. It may not be appropriate since different elements may have different inflation rates. But the impact may not be very significant even if an average rate is taken. The effort required to estimate the inflation rate for each element may not justify the accuracy that may be obtained. If the understanding in the project is that sales and costs may increase by different values very different from the average inflation, then we may need to consider the inflation separately. Question 9 NPV $178,337 IRR 21.6% MIRR 17.6% ARR 28.5% Payback 2.56 years (The figures are from the attached file with Cell C38 = 4% and C39 =2% – sales inflation taken at 4% and cost inflation at 2%) Question 10 a. The NPV would decrease since the costs will be higher and the new NPV is $98,762 NPV $98,762 IRR 17.5% MIRR 15.2% ARR 22.2% Payback 2.76 years (The

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