Carlota (Pty) Ltd is a car manufacturing company that manufactures and sells cars. The company is considering the production of a new type of car, the Helopark model concept car, which will require an initial investment of R7 million. As the manufacturing industry is highly competitive and rapidly evolving, the expected lifespan of this concept car will be six years. Additional information: 1. The expected cash inflows and cash outflows for the Helopark model concept car over the 6-year life span is as follows: 6 8500 5800 2. The company's cost of capital is at 10% per annum. 3. The capital investment can be sold for 10% of the initial investment at the end of its useful life. 4. The company aims to recover its initial investment in 4 years. Required: 1.1 Note: all workings need to be clearly shown. Present your answers in thousands ( R000). 1.1.1 Calculate the payback period for Carlota expressed in years and months. (10) 1.1.2 Calculate the net present value (NPV) for the Carlota. Note: use the following template for your NPV calculation: 1.1.3 Based on your answers to 1.1 .1 and 1.1.2, would you recommend the production of the concept car? Support your answer. (4) 1.2 Briefly explain why the payback period cannot be solely used in determining the viability of a project. (3) Carlota (Pty) Ltd is a car manufacturing company that manufactures and sells cars. The company is considering the production of a new type of car, the Helopark model concept car, which will require an initial investment of R7 million. As the manufacturing industry is highly competitive and rapidly evolving, the expected lifespan of this concept car will be six years. Additional information: 1. The expected cash inflows and cash outflows for the Helopark model concept car over the 6-year life span is as follows: 6 8500 5800 2. The company's cost of capital is at 10% per annum. 3. The capital investment can be sold for 10% of the initial investment at the end of its useful life. 4. The company aims to recover its initial investment in 4 years. Required: 1.1 Note: all workings need to be clearly shown. Present your answers in thousands ( R000). 1.1.1 Calculate the payback period for Carlota expressed in years and months. (10) 1.1.2 Calculate the net present value (NPV) for the Carlota. Note: use the following template for your NPV calculation: 1.1.3 Based on your answers to 1.1 .1 and 1.1.2, would you recommend the production of the concept car? Support your answer. (4) 1.2 Briefly explain why the payback period cannot be solely used in determining the viability of a project. (3)
