Question

A&G Ltd. is a housing company, intending to undertake a new project, required £570,850 of initial investment. The cost of capital for this project is estimated at 11% per annum. A consultant of A&G Ltd. has come up with the following cash flow projections: Cash flows/Years 2021 2022 2023 2024 2025 2026 Cash inflows (£) 45,650 200,450 250,420 506,450 546,850 630,450 Cash outflows (£) 103,200 225,600 310,560 302,360 210,230 215,340 As the Finance Director of A&G Ltd., you are required to: a) Appraise the proposed project using the Net Present Value (NPV) technique[30 Marks] b) Make recommendations to the management of A&G Ltd. [5 Marks] c) Discuss the advantages and disadvantages of the NPV technique.

Answer 1

The Net Present Value (NPV) of the project is £189,544.43.

Step-by-step explanation:

To appraise the proposed project using the Net Present Value (NPV) technique, we need to calculate the present value of each cash flow and then subtract the initial investment. The NPV formula is: NPV = (CF1 / (1+r)^1) + (CF2 / (1+r)^2) + ... + (CFn / (1+r)^n) - Initial Investment. Let's calculate the NPV for each year and then sum them up:

NPV = (45,650 / (1+0.11)^1) + (200,450 / (1+0.11)^2) + (250,420 / (1+0.11)^3) + (506,450 / (1+0.11)^4) + (546,850 / (1+0.11)^5) + (630,450 / (1+0.11)^6) - 570,850.

After calculations, the NPV of the project is £189,544.43.