DDB limited has decided to set up a factory to process groundnuts into oil. The feasibility studies cost them GH¢35,000. The consultants have advised that the initial outlay will be GH¢250,000, however, they were unable to estimate the cash inflow due to the uncertain economic environment.
Required:
Using NPV as an appraisal technique you are required to calculate;
i) The constant cash inflow needed to break even if the cost of capital is 15% and the project is to last for 10 years. (4 marks)
View Solution
At breakeven using NPV , PV of cash inflow should be equal to cash outlay.
GHS 250,000.00 = cash flow x annuity factor (15 % for 10 years)
250,000 = CF x 5.019
CF =250,000/5.019
= GHS 49,810.72
ii) By how much should the cash inflow increase to break even if cost of capital is increased to 20%. (4 marks)
View Solution
If cost of capital increases to 20% the Cash Inflow will have to increase
250,000= CF x AF (20% for 10 years)
250,000= CF x 4.192
CF = 250,000/4.192
=GHS 59,637.40
% increase = 59,637.40- 49,810.72/49,810.72
= 19.7%
iii) If the cash inflow is GH¢45,000, for how long should the project run to break even if the cost of capital is 15%. (4 marks)
View Solution
If cash inflow decreases to GHS 45,000.00 at 15% cost of capital it will take a longer time to breakeven
250,000 = 45,000 x AF
AF = 250,000/45,000
=5 .556
5.556 will lie between years 12 and 13
Yr 12 = 5.421, Yr 13 = 5.583
IF 0.162 = 1 yr
0.135 = 0.135/0.162
= 0.833 x 12
= 10 months
Therefore it will take 12 years 10 months to breakeven