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OAP Answer

The document outlines the nominal after-tax NPV calculations for project E, showing a negative NPV of -46,270. It also discusses the maximum NPV obtainable from a $10 million investment, resulting in a maximum NPV of 3,050,000 by prioritizing projects D, C, and A. Additionally, it mentions that the board is restricted in investment funds due to hard and soft capital rationing.

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17 views1 page

OAP Answer

The document outlines the nominal after-tax NPV calculations for project E, showing a negative NPV of -46,270. It also discusses the maximum NPV obtainable from a $10 million investment, resulting in a maximum NPV of 3,050,000 by prioritizing projects D, C, and A. Additionally, it mentions that the board is restricted in investment funds due to hard and soft capital rationing.

Uploaded by

Vinn Sze Choy
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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Pg 75 - OAP Co

a) Nominal after tax NPV for project E

Year 0 1 2 3 4 5
Demand 12,000 13,000 10,000 10,000

Sales 5,670,000 6,807,938 5,788,125 6,928,386


Variable cost (3,307,200) (4,089,904) (3,513,497) (4,039,926)
Fixed cost (776,250) (803,419) (831,538) (860,642)
TAD/BA (1,250,000) (937,500) (703,125) (1,709,375)
Taxable profit - 336,550 977,115 739,964 318,442 -
(-) tax @ 28% (94,234) (273,592) (207,190) (89,164)
(+) TAD/BA 1,250,000 937,500 703,125 1,709,375 -
Investment (5,000,000) 400,000
Net cash flows (5,000,000) 1,586,550 1,820,381 1,169,497 2,220,627 (89,164)
DF @ 13% 1 0.885 0.783 0.693 0.613 0.543
Present value (5,000,000) 1,404,027 1,425,625 810,520 1,361,952 (48,395)

NPV @ FUNCTION (46,270) (46,270)

Working
Year 0 1 2 3 4 5
Sales after inflation 473 524 579 693
VC after inflation (276) (315) (351) (404)
FC after inflation (776,250) (803,419) (831,538) (860,642)

TAD/BA
Investment 5,000,000
Scrap 400,000
TAD/BA 1,250,000 937,500 703,125 1,709,375

b) Calculate the maximum NPV which can be obtained from investing the fund of $10mil.
Project NPV Initial inv PI PI Ranking Strategic ranking
A 1,000,000 2,500,000 0.400 4 5
B 1,500,000 2,200,000 0.682 2 3
C 1,350,000 2,600,000 0.519 3 4
D 1,500,000 1,900,000 0.789 1 2
E - 5,000,000 - 1

Statement of utilising capital available and MAX NPV (B rank no.3 but missing because B & D are mutually exclusive)
D produced earlier than B, hence we give up B
Max cap available 10,000,000 NPV
Used for project:
E 5,000,000 -
D 1,900,000 1,500,000
C 2,600,000 1,350,000
A (max) 500,000 200,000
Max NPV 10,000,000 3,050,000

c) Discuss the reason why the board are restricted to limit investment fund for next year
The reason will be hard and soft capital rationing.

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