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Hi John, I am in the process of calculating the nominal after-tax NPV of a project in order to comment on the financial acceptability of it. I just wanted to get your thoughts on my calculations.
Key details for the project are as follows:
Sales Volume (1-4): 12,000 – 13,000 – 10,000 – 10,000
Selling Price (1-4): 450 – 475 – 500 – 570
Variable Cost (1-4): 260 – 280 – 295 – 320
Fixed Costs: 750,000 per yearSelling Price inflation: 5%
Variable Cost inflation: 6%
Fixed Cost inflation: 3.5%End of 4 years, scrap value of machinery sold at £400,000
Tax allowable depreciation on initial investment 25% reducing balance.
Corporation tax 28%, one year in arrears.
Balancing charge/allowance available at end of the 4th year
Nominal after-tax cost of capital 13% per year
Initial investment cost is £5,000,000————————————
A synopsis of my calculations is:
Contribution 1 – 4 (Sales less VC): 2363 – 2718 – 2275 – 2888
Pre Tax CF 1 – 4 (Contribution less FC): 1587 – 1915 – 1443 – 2028Post Tax CF 1 – 5 @20%: 1470 – 907 – 1624 – -568
Net CF 1 – 5: -5000 – 250 – 1658 – 1048 – 2366 – -568
NDF @13%1 – 5: 1 – 0.885 – 0.783 – 0.693 – 0.613 – 0.543
PV 1 – 5: -5000 – 221 – 1298 – 726 – 1450 – -308NPV is -1613. As it is negative, it is advised that the project does not go ahead.
I hope the above is all clear. Obviously I have not included the workings, so as to avoid anymore confusion!
Thanks for your help.
Just on the above, John, I believe that I am on the right track with my answer. My main concern was in respect to accounting for the tax allowable depreciation.
On closer inspection of my calculations in this respect, I note that the above is slightly wrong.
Therefore, the tax benefits to carry forward are 350 (y1), 263 (y2), 197 (y3). For year 4, the tax benefit was 479. This takes into account deducting the scrap value of 400,000.
Therefore…
Net CF: -5000 – 350 – 1733 – 1104 2502 – -568
NDF: Same as above
PV: -5000 – 310 – 1357 – 765 – 1534 – -308NPV – 1,343 million.
I also just wanted to make sure that the above NPV represents the nominal after-tax NPV of the project?
Why are you attempting questions for which you do not have an answer? You should be using a Revision Kit from one of the ACCA approved publishers – they have answers and explanations.
I have not checked every single figure, but I have checked most of them and what you are doing is correct (with your correct to the tax figures). And yes, your answer is the nominal after-tax NPV.
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