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Project Appraisals with negative operating cash flows

Forums › ACCA Forums › ACCA FM Financial Management Forums › Project Appraisals with negative operating cash flows

  • This topic has 1 reply, 2 voices, and was last updated 6 years ago by Duc Hung.
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  • April 20, 2016 at 2:03 pm #311902
    shaira0910
    Member
    • Topics: 1
    • Replies: 0
    • ☆

    I have a question that I am looking at with the following information :

    Project Life 10 years

    Sales forecast : Year 1 – 1,000
    Year 2 – 40,000
    Years 3 to 7 – 10,000
    Years 8 – 5,000
    Year 9 -2,000
    Year 10 – 1,000

    Unit selling price 5. Variable Cost 3.50. Fixed cost 3,000.
    New plant and equipment for the project – 7,500.00; 10 years of useful life, zero salvage value and will be depreciated on a straight line basis.

    10% of sales revenue is required for Net Working Capital each year but this investment required now.

    Required rate of return 15%.

    Calculate: NPV, IRR and Profitability Index.

    My calculations for NPV gives me = 8,029 and Net Operating Losses in Years 1, 9 and 10 which I am not sure I am dealing with properly, particularly the taxation aspect of this.

    Can someone confirm if I am on the right track?

    Thank you

    June 7, 2016 at 7:55 pm #320560
    Duc Hung
    Member
    • Topics: 14
    • Replies: 66
    • ☆☆

    I think operating loss may lead to tax saving in investment appraisal. The same effect as tax-allowable depreciation.

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