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CTMiot Construction is considering a new project, which requires an investment of GHc 2million. The project is expected to generate sales revenue of GHc 1
CTMiot Construction is considering a new project, which requires an investment of GHc 2million. The project is expected to generate sales revenue of GHc 1 million in the first year, GHc 2million in the second year and GHc 3 million each for years 3,4,5. The cost of goods sold is expected to be 75% of sales in the first year and 5% of sales thereafter. The project will need working capital investment of GHc 200,000 in the first year and an additional GHc 100,000 in the second year. The investment in plant GHc 2 million will be depreciated using the straight line method/reducing balance method. The Company's opportunity cost of capital is 10%. a) Calculate the NPV for the project. Assume that the plant will operate for 6 years, the plant can be sold for a salvage value of GHc300,000 at the end of the 5th year. The tax rate for the Company is 36%. b)Determine the profitability index of the project. Explain your answer c)Calculate the internal rate of return of the project. Explain your answer. c)State 2 advantages of NPV over the Payback period method
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