SECTION II (6
Question Twenty One
Miwani Limited plans to invest in a 5-year project in the year 2024. However, the inform
The company would wish to carry out a scenario analysis:
The following data is available given three scenarios. The optimistic and pessimistic sce
from expected. Scenario
Expected Optimistic Pessimistic
Sh.
Initial Investment 100,000,000.00 -20% 30%
Before tax residual value 20,000,000.00 10% -10%
Initial working capital 15,000,000.00 -5% 5%
Revenues 140,000,000.00 10% -15%
Direct costs 60,000,000.00 -20% 20%
Incremental fixed costs 40,000,000.00 -10% 10%
Capital allowance 30% N/A N/A
Inflation rate 5% 3% 8%
Tax rate 30% 30% 30%
Additional information:
1. The inflation rate applies to revenues, direct costs, incremental fixed costs and workin
Working capital will be recovered at the end of the project.
2. Revenues and costs arise from year 1.
3. The capital allowance rate is on reducing balance basis.
4. Tax will be applied on the gain/loss on disposal of the asset.
5. The weighted average cost of capital for the company is 15%.
Required:
Compute the following for each of the three scenarios:
(a) Net Present Value (NPV).
(b) Internal Rate of Return (IRR).
SECTION II (60 MARKS)
owever, the information on the project is not reliable.
and pessimistic scenarios reflect the % variance
Expected
Inflation rate 5% 2023
IO -100000000
Revenues
Direct costs
CONTRIBUTION
FIXED COST
PBTD
Depreciation
PBT
tax
PAT
Add depre
operating
cash flow
working
capital -15,000,000
d costs and working capital.
residual value
tax on profit
on disposal
cash flows -115,000,000
NPV 21902672.8376658
project is
viable
15% IRR 22%
(10 marks)
(10 marks)
(Total: 20 marks)
2024 2025 2026 2027
140000000 147000000 154350000 162067500
-60000000 -63000000 -66150000 -69457500
80000000 84000000 88200000 92610000
-40000000 -42000000 -44100000 -46305000
40000000 42000000 44100000 46305000
-30000000 -21000000 -14700000 -10290000
10000000 21000000 29400000 36015000
-3000000 -6300000 -8820000 -10804500
7000000 14700000 20580000 25210500
30000000 21000000 14700000 10290000
37000000 35700000 35280000 35500500
-750,000 -787,500 -826,875 -868,219
36250000 34912500 34453125 34632281.25
Initial Investment
Before tax residual value
Initial working capital
Revenues
Direct costs
Incremental fixed costs
Optimistic
2028 2023 2024 2025
-80000000
170170875 154000000 158620000
-72930375 -48000000 -49440000
97240500 0 106000000 109180000
-48620250 -36000000 -37080000
48620250 0 70000000 72100000
-7203000 -24000000 -16800000
41417250 0 46000000 55300000
-12425175 -13800000 -16590000
28992075 0 32200000 38710000
7203000 24000000 16800000
36195075 0 56200000 55510000
18,232,594 -14250000 -427500 -440325
20,000,000.00
-957900
73469768.75 -94250000 55772500 55069675
NPV 109763650.538139
Project is
viable
IRR 55%
80000000
22000000 Inflation rate 3% depre
14250000 66554400
154000000
48000000
36000000
2026 2027 2028
163378600 168279958 173328357
-50923200 -52450896 -54024423
112455400 115829062 119303934
-38192400 -39338172 -40518317
74263000 76490890 78785616.7
-11760000 -8232000 -5762400
62503000 68258890 73023216.7
-18750900 -20477667 -21906965
43752100 47781223 51116252
11760000 8232000 5762400
55512100 56013223 56878652
-453534.75 -467140.793 16038501
22000000
- 2,566,320
55058565.25 55546082.21 92350832
NBV PROFIT
13,445,600.00 8,554,400
2,566,320
