Task 8

Goldie clothes are planning to expand their clothing business by opening a factory overseas. The initial investment will be £12,500,000. It is expected to generate net revenues of £6,500,000 each year if the project goes ahead. Additional costs for the project will be £3,000,000 per year. [Cashflows occur at the end of each year]

The company’s weighted average cost of capital is 11% and the project will have a lifetime of 5 years.

(a) Calculate the net present value (NPV) of the above proposal showing your workings in an excel spreadsheet including formulas. You should complete your answer on the “Task 8 – Data” tab of the “MBF Summative data.xlsx” excel file.

(b) Calculate the Payback period of the above proposal in years and months. Round up to the next month.

c) Describe two advantages of using the NPV method over the Payback method and conclude whether it is still worth using the Payback technique as part of the investment appraisal process.  

Final-MBF-Summative-data-for-students