Tutorial 10

Financial Management

Tutorial Question
 Part (a)
Y0 Y1 Y2 Y3 Y4 Y5

Contribution 300,000 300,000 300,000 300,000 300,000

Fixed costs (160,000) (160,000) (160,000) (160,000) (160,000)

Investment/ (520,000) 100,000

Residual value
Cash flows (520,000) 140,000 140,000 140,000 140,000 240,000

COC(12%) 1.000 0.893 0.797 0.712 0.636 0.567

PV (520,000) 125,020 111,580 99,680 89,040 136,080

NPV 41,400
 Y0 Y1 Y2 Y3 Y4 Y5

Contribution 300,000 300,000 300,000 300,000 300,000

Fixed costs (160,000) (160,000) (160,000) (160,000) (160,000)

Investment/ (520,000) 100,000

Residual value
Cash flows (520,000) 140,000 140,000 140,000 140,000 240,000

COC(20%) 1.000 0.833 0.694 0.579 0.482 0.402

PV (520,000) 116,620 97,160 81,060 67,480 96,480

NPV (61,200)
 Part (b) (i)
• An 8% change in the discount rate leads to a
$102,600 change in the NPV of the project.
• Thus, for every 1% change in the discount rate
there is a $12,825 ($102,600k/8) change in the
NPV.
• To achieve a NPV of zero, the discount rate
must increase by 42,000/12,825 = 3.3%.
Hence the IRR is 12% + 3.3% = 15.3%.
 Part (b) (ii)
• The initial cost would have to increase by
$41,400 for the project to become unprofitable.
• This represents an increase of 8.0%
(41,400/520,000).
 Part (b) (iii)
• The annual operating cash flows × annuity
factor for a five year period -NPV =0
• Annual operating cash flows =NPV/ annuity
factor for a five year period
• AOCF = $ 41,400 / 3.6048
• = $11,485
• This is a reduction of just over 8.2%
($11,485/140,000) on the cash flow figures
provided.
 Part (b) (iv)
Residual value of machinery and equipment
• = NPV/ Discount factor at end of five years
• = $42,000 /0.5674
• = $74,022

• This is a decrease of over 74.0%

(74,022/100,000) on the figure provided.
Part (c)
Part (c)
Part (d)
• http://wps.pearsoned.ca/wps/media/objects/
6119/6265916/atrill_sol_pc_ch07.pdf