Project Management

QUESTION 1

Basic Information:

Sales: Year 1 Nil

Year 2 RM 10,000

Year 3 -6 RM 15,000

Costs:

Fixed cost Year 1-6 RM 3,000

Variable cost 30% of sales

Investment RM 25,000

Terminal Value of InvestmentRM 5,000

Depreciation 10% of initial investment

Please prepare the Cash Flow Statement and estimate – (a) Payback Period; (b) Net Present Value (NPV) at 10% discount rate; and (c) Internal Rate of Return for the Project. Also prepare a Profit &Loss Statement and compute the average profit for the Project life.

ANSWER：

Cash Flow Statement

Cash Flow Statement |

  | RM |

  | Year 1 | Year 2 | Year 3 | Year 4 | Year 5 | Year 6 |

Sales | − | RM10,000 | RM15,000 | RM15,000 | RM15,000 | RM15,000 |

Terminal Value | − | − | − | − | − | RM5,000 |

  | RM0 | RM10,000 | RM15,000 | RM15,000 | RM15,000 | RM20,000 |

  |   |   |   |   |   |   |

Costs: |   |   |   |   |   |   |

Fixed cost | (RM3,000) | (RM3,000) | (RM3,000) | (RM3,000) | (RM3,000) | (RM3,000) |

Variable cost | − | (RM3,000) | (RM4,500) | (RM4,500) | (RM4,500) | (RM4,500) |

Investment | (RM25,000) | − | − | − | − | − |

  | (RM28,000) | (RM6,000) | (RM7,500) | (RM7,500) | (RM7,500) | (RM7,500) |

  |   |   |   |   |   |   |

Net CashFlow | (RM28,000) | RM4,000 | RM7,500 | RM7,500 | RM7,500 | RM12,500 |

(a) Payback Period

The numbers of years it takes for the Net Cash Flow to become positive as follow:

Year 1 | Year 2 | Year 3 | Year 4 | Year 5 | Year 6 |

(-RM28,000) | (-RM24,000) | (-RM16,500) | (-RM9,000) | (-RM1,500) | RM11,000 |

Payback Period is Year 6.

(b) Net Present Value (NPV) at 10% discount rate;

Year 1 | Year 2 | Year 3 | Year 4 | Year 5 | Year 6 |

(-RM28,000) | RM4,000 | RM7,500 | RM7,500 | RM7,500 | RM12,500 |

1.1% | 1.21% | 1.331% | 1.464% | 1.611% | 1.772% |

(-25,454.55)+ | 3,305.79+ | 5,634.86 + | 5,122.95 + | 4,655.49 + |...