Assume initial investment for an asset
as = Mu 150,000 and there is no salvage value at the end of
its life of 5 years. A straight line method of depreciation
is to be used. The cash flows are as given below:
|
End
of Period Cash Flows (in Mu) |
| Cash
Revenue |
80,000 |
100,000 |
115,000 |
150,000 |
175,000 |
| Cash
Expenses |
20,000 |
25,000 |
25,000 |
40,000 |
50,000 |
Assume cost of capital as 12 %. Find the NPW
of this asset.
Depreciation per year = 150,000/5 = Mu
30,000 per year
|
|
0
|
1
|
2
|
3
|
4
|
5
|
Cash Revenue
|
- |
80,000 |
100,000 |
115,000 |
150,000 |
175,000 |
Cash Expenses
|
- |
20,000 |
25,000 |
25,000 |
40,000 |
50,000 |
Investment
|
150,000 |
|
|
|
|
|
Depreciation
|
- |
30,000 |
30,000 |
30,000 |
30,000 |
30,000 |
Net Cash Flow
|
- |
30,000 |
45,000 |
60,000 |
80,000 |
95,000 |
Assumed interest rate = 12 % so value of i = 12/100 = 0.12
NPW = -150,000 + 30,000/(1+0.12) + 45,000/(1+0.12)**2 + 60,000/(1+0.12)**3+
80,000/(1+0.12)**4+ 95,000/(1+0.12)**5
= -150,000+ 26785.71+35873.72+42706.81+50841.45+ 53905.55
= + 60,113.24
Since NPW is positive, go for this asset. |
|
