3. PRESENT VALUE TABLE Lagosti is a food retail company. Its management is considering modernising its retail outlet in Kenya by expanding the shop floor. The planned investment is $1.6 million. The company expects that undertaking this investment will attract an additional 55,000 customers, each of whom will spend on average $45.00 per year. The variable costs associated with this investment is expected to be $35.00 per customer. Operating the expanded retail outlet will incur an additional $300,000 fixed costs (all cash). The cost of capital of the company is 8%. The company assesses its expansion projects over a 10-year period although the profitability of the expansion is expected to continue for 15 years. The book value of the expansion will be written down over the 15 years to zero. Required: Present value of $1, that is (1+r)" where r= interest rate, n=number of periods until payment or receipt Periods Interest rates 0 1% 2% 3% 4% 5% 6% 7% 8% 9% 10% % 1 0.990 0.980 0.971 0.962 0.952 0.943 0.935 0.926 0.917 0.909 2 0.980 0.961 0.943 0.925 0.907 0.890 0.873 0.857 0.842 0.826 3 0.971 0.942 0.915 0.889 0.864 0.840 0.816 0.794 0.772 0.751 4 0.961 0.924 0.888 0.855 0.823 0.792 0.763 0.735 0.708 0.683 5 0.951 0.906 0.863 0.822 0.784 0.747 0.713 0.681 0.650 0.621 6 0.942 0.888 0.837 0.790 0.746 0705 0.666 0.630 0.596 0.564 7 7 0.933 0.871 0.813 0.760 0.711 0.665 0.623 0.583 0.547 0.513 8 0.923 0.853 0.789 0.731 0.677 0.627 0.582 0.540 0.502 0.467 9 0.914 0.837 0.766 0.703 0.645 0.592 0.544 0.500 0.460 0.424 10 0.905 0.820 0.744 0.676 0.614 0.558 0.508 0.463 0.422 0.386 11 0.896 0.804 0.722 0.650 0.586 0.527 0.475 0.429 0.388 0.350 12 0.887 0.788 0.701 0.625 0.557 0.497 0444 0.397 0.356 0.319 13 0.879 0.773 0.681 0.601 0.530 0.469 0.415 0.368 0.326 0.290 14 0.870 0.758 0.661 0.577 0.442 0.388 0.340 0.299 0263 15 0.861 0.743 0.642 0.555 0.481 0.417 0.362 0.315 0.275 0.239 16 0.853 0.728 0.623 0.534 0.458 0.394 0.339 0.292 0.252 0218 17 0.844 0.714 0.605 0.513 0.436 0.371 0.317 0.270 0.231 0.198 18 0.83 0.700 0.587 0.494 0.416 0.350 0.296 0.250 0.212 0.180 19 0.828 0.686 0.000 0.570 0979 0.475 0.396 0.331 0277 0.232 0.194 0.164 20 0.820 0.673 0.564 10 0.456 0.377 0.312 0258 0.215 0.178 0.149 0.505 1. Calculate the net annual cash flow and the annual depreciation charge. (6 marks) 2. Calculate the payback period of the project. (3 marks) 3. Calculate the average annual profit and the simple accounting rate of return of the project. (6 marks) ) 4. Calculate the NPV of the proposed investment over the 10-year assessment period. (8 marks) 5. Drawing on your analyses above, what would be your recommendation to Lagosti regarding its proposed investment? (7 marks) Total: 30 marks
