Appendix 1 ~ Investment opportunity 1 ~ Build new factory abroad

Workings
Year

2010
0 = 2011
1 = 2012
2 = 2013
3 = 2014
4 = 2015
5 = 2016

Base year

Base + Option 1

(a)

(b)

million

million

Initial investment

1 = 6.00
2 = 2.00

Sales

Sales

8.00
8.00 x 1.02 x 1.01 = 8.24
8.24 x 1.02 x 1.01 = 8.49
8.49 x 1.02 x 1.01 = 8.75
8.75 x 1.02 x 1.01 = 9.01
9.01 x 1.02 x 1.01 = 9.28
9.28 x 1.02 x 1.01 = 9.56
Cost of Sales

2010
0 = 2011
1 = 2012
2 = 2013
3 = 2014
4 = 2015
5 = 2016

Cost of Sales

3.84
3.84 x 1.02 x 1.01 = 3.96
3.96 x 1.02 x 1.01 = 4.08
4.08 x 1.02 x 1.01 = 4.20
4.20 x 1.02 x 1.01 = 4.33
4.33 x 1.02 x 1.01 = 4.46
4.46 x 1.02 x 1.01 = 4.59
Adm & Selling Costs

2010
0 = 2011
1 = 2012
2 = 2013
3 = 2014
4 = 2015
5 = 2016

3.84
3.96
10.93 x 48% = 5.25
14.49 x 42% = 6.09
19.21 x 38% = 7.30
19.79 x 34% = 6.73
20.39 x 30% = 6.12
Adm & Selling Costs

2.09
2.09 x 1.02 x 1.01 = 2.15
2.15 x 1.02 x 1.01 = 2.21
2.21 x 1.02 x 1.01 = 2.28
2.28 x 1.02 x 1.01 = 2.35
2.35 x 1.02 x 1.01 = 2.42
2.42 x 1.02 x 1.01 = 2.49
Depreciation

2010

8.00
8.24
8.24 x 1.30 x 1.02 = 10.93
10.93 x 1.30 x 1.02 = 14.49
14.49 x 1.30 x 1.02 = 19.21
19.21 x 1.01 x 1.02 = 19.79
19.79 x 1.01 x 1.02 = 20.39

2.09
2.15
2.15 x 1.10 x 1.02 = 2.41
2.41 x 1.10 x 1.02 = 2.70
2.70 x 1.02 = 2.75
2.75 x 1.02 = 2.81
2.81 x 1.02 = 2.87
Depreciation

0.89

0.89

0 = 2011
1 = 2012
2 = 2013
3 = 2014
4 = 2015
5 = 2016

0.89
0.89
0.89
0.89
0.89
0.89

Interest
2010
0 = 2011
1 = 2012
2 = 2013
3 = 2014
4 = 2015
5 = 2016

Interest
0.48
0.48
0.48
0.48
0.48
0.48
0.48

Working capital
2010
0 = 2011
1 = 2012
2 = 2013
3 = 2014
4 = 2015
5 = 2016

0.89
0.89 + [8.00 + 0.04)/20] = 1.29
0.89 + [8.00 + 0.04)/20] = 1.29
0.89 + [8.00 + 0.04)/20] = 1.29
0.89 + [8.00 + 0.04)/20] = 1.29
0.89 + [8.00 + 0.04)/20] = 1.29

0.48
0.48
0.80
0.80
0.80
0.80
0.80
Working capital

0.50
0.50 x 1.30 = 0.65
0.65 x 1.30 = 0.85
0.85 x 1.30 = 1.11
1.11
1.11

Incremental cash flow Discount factor

PV

(c) = (b) - (a)

(d)

(e) = (c) x (d)

million

8.56%

million

1 = 6.00
2 = 2.00

1
1/1.0856

Sales
1.00
0.92
0.85
0.78
0.72
0.66

1.00
0.92
0.85
0.78
0.72
0.66

1.00
0.92
0.85
0.78
0.72
0.66

Cost of Sales

Adm & Selling Costs

Depreciation
-

0.40
0.40
0.40
0.40
0.40

Interest
0.32
0.32
0.32
0.32
0.32

1.00
0.92
0.85
0.78
0.72
0.66

Working capital

0.65 - 0.50 = 0.15

0.85 - 0.65 = 0.20
1.11 - 0.85 = 0.26
-

1.00
0.92
0.85
0.78
0.72
0.66

0.29
0.27
0.25
0.23
0.21

Incremental cash flow for investment opportunity 1 ~ Build new factory abroad (see Appendix 1)
Year

Sales
Less: Cost of sales
Gross operating profit
Less: Admin & Selling Costs
Less: Depreciation
Less: Interest
Profit before tax
Tax @ 30%
After-tax profit
Add: Depreciation
Add: Interest

Working capital
Land & factory

Discount factors @ 8.56%

Present values

Net present value

2011
2012
2013
2014
2015
2016
0
1
2
3
4
5
million
million
million
million
million
million
9.96
------------------ ------------------ ------------------ ------------------ ------------------ -----------------9.96
-

2017
6
million

(0.40)
(0.40)
(0.40)
(0.40)
(0.40)
(0.32)
(0.32)
(0.32)
(0.32)
(0.32)
------------------ ------------------ ------------------ ------------------ ------------------ -----------------(0.72)
(0.72)
9.24
(0.72)
(0.72)
(0.22)
(0.22)
2.77
(0.22)
(0.22)
------------------ ------------------ ------------------ ------------------ ------------------ ------------------ -----------------(0.72)
(0.50)
9.46
(3.49)
(0.50)
0.22
-----------------(0.50)
(6.00)
-----------------(6.50)
1.00
-----------------(6.50)
========
(2.47)
========

0.40
0.32
-----------------(0.16)
(2.00)
-----------------(2.16)
0.92
-----------------(1.99)
========

0.40
0.32
-----------------0.22
(0.21)
-----------------0.01
0.85
-----------------0.01
========

0.40
0.32
-----------------10.18
(0.28)
-----------------9.90
0.78
-----------------7.72
========

0.40
0.32
-----------------(2.77)
-----------------(2.77)
0.72
-----------------(1.99)
========

0.40
0.32
-----------------0.22
-----------------0.22
0.66
-----------------0.15
========

-----------------0.22

-----------------0.22
0.61
-----------------0.13
========

Appendix 2 ~ Investment opportunity 2 ~ Enter into the retail business

Workings
Year

2010
0 = 2011
1 = 2012
2 = 2013
3 = 2014
4 = 2015
5 = 2016

Base year

Base + Option 2

(a)

(b)

(c) = (b) - (a)

(d)

million

million

million

8.56%

Initial investment

1 = 5.00

1 = 5.00

1
1/1.0856

Sales

Sales

Sales

8.00
8.00 x 1.02 x 1.01 = 8.24
8.24 x 1.02 x 1.01 = 8.49
8.49 x 1.02 x 1.01 = 8.75
8.75 x 1.02 x 1.01 = 9.01
9.01 x 1.02 x 1.01 = 9.28
9.28 x 1.02 x 1.01 = 9.56
Cost of Sales

2010
0 = 2011
1 = 2012
2 = 2013
3 = 2014
4 = 2015
5 = 2016

3.84
3.84 x 1.02 x 1.01 = 3.96
3.96 x 1.02 x 1.01 = 4.08
4.08 x 1.02 x 1.01 = 4.20
4.20 x 1.02 x 1.01 = 4.33
4.33 x 1.02 x 1.01 = 4.46
4.46 x 1.02 x 1.01 = 4.59

Incremental cash flow Discount factor

8.00
8.24
8.24 x 1.225 x 1.02 = 10.30
10.30 x 1.225 x 1.02 = 12.87
12.87 x 1.225 x 1.02 = 16.08
16.08 x 1.225 x 1.02 = 20.09
20.09
Cost of Sales
3.84
3.96
(3.96 x 1.225 x 1.02) + (0.99 x 1.02) = 5.96
5.96 x 1.225 x 1.02 = 7.45
7.45 x 1.225 x 1.02 = 9.31
9.31 x 1.225 x 1.02 = 11.63
11.63

1.00
0.92
0.85
0.78
0.72
0.66

Cost of Sales
-

1.00
0.92
0.85
0.78
0.72
0.66

Adm & Selling Costs

2010
0 = 2011
1 = 2012
2 = 2013
3 = 2014
4 = 2015
5 = 2016

Adm & Selling Costs

2.09
2.09 x 1.02 x 1.01 = 2.15
2.15 x 1.02 x 1.01 = 2.21
2.21 x 1.02 x 1.01 = 2.28
2.28 x 1.02 x 1.01 = 2.35
2.35 x 1.02 x 1.01 = 2.42
2.42 x 1.02 x 1.01 = 2.49
Depreciation

2010
0 = 2011
1 = 2012
2 = 2013
3 = 2014
4 = 2015
5 = 2016

Depreciation
0.89
0.89
0.89
0.89
0.89
0.89
0.89

Interest
2010
0 = 2011
1 = 2012
2 = 2013
3 = 2014
4 = 2015
5 = 2016

0.48
0.48
0.48 + (5.00 x 50% x 8%) = 0.68
0.68
0.68
0.68
0.68
Working capital

1.00
0.92
0.85
0.78
0.72
0.66

Depreciation

0.89
0.89
0.89 + (5.00/20) = 1.14
0.89 + (5.00/20) = 1.14
0.89 + (5.00/20) = 1.14
0.89 + (5.00/20) = 1.14
0.89 + (5.00/20) = 1.14

Interest
0.48
0.48
0.48
0.48
0.48
0.48
0.48

Working capital

2.09
2.15
2.15 x 1.245 = 2.68
2.68 x 1.245 = 3.34
3.34 x 1.245 = 4.16
4.16 x 1.245 = 5.18
5.18 x 1.02 = 5.28

Adm & Selling Costs

-

0.25
0.25
0.25
0.25
0.25

Interest
0.20
0.20
0.20
0.20
0.20
Working capital

1.00
0.92
0.85
0.78
0.72
0.66

2010
0 = 2011
1 = 2012
2 = 2013
3 = 2014
4 = 2015
5 = 2016

0.50
0.50 x 1.225 = 0.61
0.61 x 1.225 = 0.75
0.75 x 1.225 = 0.92
0.92 x 1.225 = 1.13
1.13

0.61 - 0.50 = 0.11

0.75 - 0.61 = 0.14
0.92 - 0.75 = 0.17
1.13 - 0.92 = 0.21
-

1.00
0.92
0.85
0.78
0.72
0.66

PV
(e) = (c) x (d)
million

Incremental cash flow for investment opportunity 2 ~ Enter into the retail business (see Appendix 2)
Year

Sales
Less: Cost of sales
Gross operating profit

2011
2012
2013
2014
2015
2016
0
1
2
3
4
5
million
million
million
million
million
million
------------------ ------------------ ------------------ ------------------ ------------------ ------------------

2017
6
million

Less: Admin & Selling Costs

Less: Depreciation
(0.25)
(0.25)
(0.25)
(0.25)
(0.25)
Less: Interest
(0.20)
(0.20)
(0.20)
(0.20)
(0.20)
------------------ ------------------ ------------------ ------------------ ------------------ -----------------Extra contribution
(0.45)
(0.45)
(0.45)
(0.45)
(0.45)
Tax @ 30%
After-tax profit

(0.14)
(0.14)
(0.14)
(0.14)
(0.14)
------------------ ------------------ ------------------ ------------------ ------------------ ------------------ -----------------(0.45)
(0.31)
(0.31)
(0.31)
(0.31)
0.14

Add: Depreciation
Add: Interest

-----------------Working capital
(0.50)
Land & factory
(5.00)
-----------------(5.50)
Discount factors @ 8.56%
1.00
-----------------Present values
(5.50)
========
Net present value

(5.55)
========

0.25
0.20
-----------------(0.12)
-----------------(0.12)
0.92
-----------------(0.11)
========

0.25
0.20
-----------------0.14
(0.15)
-----------------(0.01)
0.85
-----------------(0.01)
========

0.25
0.20
-----------------0.14
(0.19)
-----------------(0.05)
0.78
-----------------(0.04)
========

0.25
0.20
-----------------0.14
(0.24)
-----------------(0.10)
0.72
-----------------(0.07)
========

0.25
0.20
-----------------0.14
-----------------0.14
0.66
-----------------0.09
========

-----------------0.14

-----------------0.14
0.61
-----------------0.09
========

Net present value for base case - No investment take place (see Appendix 1 & 2)
Year

Sales
Less: Cost of sales
Gross Operating Profit
Less: Expenses
Administration and Selling Costs
Depreciation
Interest paid
Profit before tax
Less: Taxation @ 30%
Net profit

Profit before tax

Add back
~ Depreciation
~ Interest paid
Less: Taxation @ 30%
Net operating cash flows
Discount factor at 8.60%
Present values

2010
million
8.00
3.84
-----------------4.16

2011
2012
0
1
million
million
8.24
8.49
3.96
4.08
----------------------- -----------------4.28
4.41

2.09
2.15
2.21
0.89
0.89
0.89
0.48
0.48
0.48
------------------ ----------------------- -----------------0.70
0.76
0.83
(0.21)
(0.23)
(0.25)
------------------ ----------------------- -----------------0.49
0.53
0.58
------------------ ----------------------- -----------------0.70

0.76

0.83

0.89
0.89
0.89
0.48
0.48
0.48
(0.21)
(0.23)
------------------ ----------------------- -----------------1.97
1.000
0.921
------------------ ----------------------- -----------------1.81
======== ========== ========

Net present value for Investment Opportunity 1 - Build new factory abroad (see Appendix 1)
Year

2010
million

2011
0
million

2012
1
million

Capital investment
Working capital
Sales
Less: Cost of sales
Gross Operating Profit
Less: Expenses
Administration and Selling Costs
Depreciation
Interest paid
Profit before tax
Less: Taxation @ 30%
Net profit

Profit before tax

Add back
~ Depreciation
~ Interest paid
Less: Taxation @ 30%
Net operating cash flow
Discount factors at 8.56%
Present values

(6.00)
-

(2.00)
(0.15)

8.00
8.24
10.93
3.84
3.96
5.25
------------------ ----------------------- -----------------4.16
4.28
5.68

2.09
2.15
2.41
0.89
0.89
1.29
0.48
0.48
0.80
------------------ ----------------------- -----------------0.70
0.76
1.18
(0.21)
(0.23)
(0.35)
------------------ ----------------------- -----------------0.49
0.53
0.83
------------------ ----------------------- -----------------0.70

0.76

1.18

0.89
0.89
1.29
0.48
0.48
0.80
(0.21)
(0.23)
------------------ ----------------------- -----------------3.04
1.000
0.921
------------------ ----------------------- -----------------(6.00)
0.82
------------------ ----------------------- ------------------

Net present value for Investment Opportunity 2 - Enter into the retail business (see Appendix 2)
Year

Capital investment
Working capital

2010
million
-

2011
0
million
(5.00)
-

2012
1
million
(0.11)

Sales
Less: Cost of sales
Labour costs (+50% & 102%)
Gross Operating Profit
Less: Expenses
Administration and Selling Costs
Depreciation
Interest paid
Profit before tax
Less: Taxation @ 30%
Net profit

Profit before tax

Add back
~ Depreciation
~ Interest paid
Less: Taxation @ 30%
Net operating cash flow
Discount factors at 8.56%
Present values

8.00
8.24
10.30
3.84
3.96
4.95
1.01
------------------ ----------------------- -----------------4.16
4.28
4.34

2.09
2.15
2.68
0.89
0.89
1.14
0.48
0.48
0.68
------------------ ----------------------- -----------------0.70
0.76
(0.16)
(0.21)
(0.23)
0.05
------------------ ----------------------- -----------------0.49
0.53
(0.11)
------------------ ----------------------- -----------------0.70

(0.16)

0.89
0.89
1.14
0.48
0.48
0.68
(0.21)
(0.23)
------------------ ----------------------- -----------------1.43
1.00
0.92
------------------ ----------------------- -----------------(5.00)
1.21
------------------ ----------------------- ------------------

Net NPV
(a) Base case - with no investment
(b) Base + Investment opportunity 1
(c) Base + Investment opportunity 2

0.76

million
7.89
15.37
3.34

Incremental /
Decrement
million
7.48 (b) - (a)
(4.55) (c) - (a)

2013
2014
2015
2016
2
3
4
5
million
million
million
million
8.75
9.01
9.28
9.56
4.20
4.33
4.46
4.59
------------------ ------------------ ------------------ -------------------------4.55
4.68
4.82
4.97

2017
6
million

2.28
2.35
2.42
2.49
0.89
0.89
0.89
0.89
0.48
0.48
0.48
0.48
------------------ ------------------ ------------------ -------------------------0.90
0.96
1.03
1.11
(0.27)
(0.29)
(0.31)
(0.33)
------------------ ------------------ ------------------ -------------------------0.63
0.67
0.72
0.78
------------------ ------------------ ------------------ -------------------------0.90

0.96

1.03

1.11

0.89
0.89
0.89
0.89
0.48
0.48
0.48
0.48
(0.25)
(0.27)
(0.29)
(0.31)
(0.33) One year in arrears
------------------ ------------------ ------------------ -------------------------- -------------------------2.02
2.06
2.11
2.17
(0.33)
0.848
0.781
0.719
0.662
0.610
------------------ ------------------ ------------------ -------------------------- -------------------------1.71
1.61
1.52
1.44
(0.20)
======== ======== ======== ============ ============

(see Appendix 1)
2013
2
million

2014
3
million

2015
4
million

2016
5
million

2017
6
million

NPV
7.89

(0.20)

(0.26)

14.49
19.21
19.79
20.39
6.09
7.30
6.73
6.12
------------------ ------------------ ------------------ -------------------------8.40
11.91
13.06
14.27

2.70
2.75
2.81
2.87
1.29
1.29
1.29
1.29
0.80
0.80
0.80
0.80
------------------ ------------------ ------------------ -------------------------3.61
7.07
8.16
9.31
(1.08)
(2.12)
(2.45)
(2.79)
------------------ ------------------ ------------------ -------------------------2.53
4.95
5.71
6.52
------------------ ------------------ ------------------ -------------------------3.61

7.07

8.16

9.31

1.29
1.29
1.29
1.29
0.80
0.80
0.80
0.80
(0.35)
(1.08)
(2.12)
(2.45)
(2.79) One year in arrears
------------------ ------------------ ------------------ -------------------------- -------------------------5.35
8.08
8.13
8.95
(2.79)
0.848
0.781
0.719
0.662
0.610
------------------ ------------------ ------------------ -------------------------- -------------------------- NPV
4.37
6.11
5.85
5.92
(1.70)
15.37
------------------ ------------------ ------------------ -------------------------- --------------------------

ess (see Appendix 2)

2013
2
million
(0.14)

2014
3
million
(0.17)

2015
4
million
(0.21)

2016
5
million

2017
6
million
-

12.87
16.08
20.09
20.09
7.45
9.31
11.63
11.63
------------------ ------------------ ------------------ -------------------------5.42
6.77
8.46
8.46

3.34
4.16
5.18
5.28
1.14
1.14
1.14
1.14
0.68
0.68
0.68
0.68
------------------ ------------------ ------------------ -------------------------0.26
0.79
1.46
1.36
(0.08)
(0.24)
(0.44)
(0.41)
------------------ ------------------ ------------------ -------------------------0.18
0.55
1.02
0.95
------------------ ------------------ ------------------ -------------------------0.26

0.79

1.46

1.36

1.14
1.14
1.14
1.14
0.68
0.68
0.68
0.68
0.05
(0.08)
(0.24)
(0.44)
(0.41)
------------------ ------------------ ------------------ -------------------------- -------------------------2.13
2.53
3.04
2.74
(0.41)
0.85
0.78
0.72
0.66
0.61
------------------ ------------------ ------------------ -------------------------- -------------------------1.69
1.84
2.04
1.81
(0.25)
------------------ ------------------ ------------------ -------------------------- --------------------------

NPV
3.34

One year in arrears

One year in arrears

Appendix 1 - Calculation of net present value

Base case - No investment take place
Real discount rate using Fisher effect: 1.086 / 1.02 = 1.0647 i.e. 6.47%
Year

Sales
Less: Cost of sales
Gross Operating Profit
Less: Expenses
Administration and Selling Costs
Depreciation
Interest paid
Profit before tax
Less: Taxation @ 30%
Profit after tax
Add back
~ Depreciation
~ Interest paid
Net operating cash flows
Discount factor at 6.47%
Present values

2011
2012
2013
2014
0
1
2
3

8,241,600
8,490,496
8,746,909
9,011,066
3,955,968
4,075,438
4,198,516
4,325,312
------------------ ------------------ ------------------ -----------------4,285,632
4,415,058
4,548,393
4,685,754

2,153,118
2,218,142
2,285,130
2,354,141
890,000
890,000
890,000
890,000
480,000
480,000
480,000
480,000
------------------ ------------------ ------------------ -----------------762,514
826,916
893,263
961,613
210,000
228,754
248,075
267,979
------------------ ------------------ ------------------ -----------------552,514
598,162
645,188
693,634

890,000
890,000
890,000
890,000
480,000
480,000
480,000
480,000
------------------ ------------------ ------------------ -----------------1,922,514
1,968,162
2,015,188
2,063,634
1.000
0.939
0.882
0.829
------------------ ------------------ ------------------ -----------------1,922,514
1,848,104
1,777,396
1,710,753
======== ======== ======== ========

Investment Opportunity 1 - Build new factory abroad

Real discount rate using Fisher effect: 1.0856 / 1.02 = 1.0643 i.e. 6.43%
Year

2011

2012

2013

2014

Sales
Less: Cost of sales
Gross Operating Profit
Less: Expenses
Administration and Selling Costs
Depreciation
Interest paid
Profit before tax
Less: Taxation @ 30%
Profit after tax
Add back
~ Depreciation
~ Interest paid
Net operating cash flow
Capital investment
Option
Working capital
Net cash flows
Discount factors at 6.43%
Present values

------------------

1
2
3

10,928,362
14,491,007
19,215,076
5,245,614
6,086,223
7,301,729
------------------ ------------------ -----------------5,682,748
8,404,784
11,913,347

2,415,798
2,710,526
2,764,736
1,292,000
1,292,000
1,292,000
800,000
800,000
800,000
------------------ ------------------ ------------------ -----------------1,174,950
3,602,259
7,056,611
352,485
1,080,678
------------------ ------------------ ------------------ -----------------1,174,950
3,249,774
5,975,933

1,292,000
1,292,000
1,292,000
800,000
800,000
800,000
------------------ ------------------ ------------------ -----------------3,266,950
5,341,774
8,067,933
(6,000,000)
(2,000,000)
(40,000)
(500,000)
(150,000)
(195,000)
(253,500)
------------------ ------------------ ------------------ -----------------(6,540,000)
1,116,950
5,146,774
7,814,433
1.000
0.940
0.883
0.829
------------------ ------------------ ------------------ -----------------(6,540,000)
1,049,933
4,544,601
6,478,165
------------------ ------------------ ------------------ ------------------

Workings
Year
Working capital ()
Incremental investment ()

2011
0
500,000
-

2012
1
650,000
(150,000)

2013
2
845,000
(195,000)

2014
3
1,098,500
(253,500)

Investment Opportunity 2 - Enter into the retail business

Real discount rate using Fisher effect: 1.0856 / 1.02 = 1.0643 i.e. 6.43%
Year

Sales
Less: Cost of sales
Labour costs (+50% & 102%)
Gross Operating Profit
Less: Expenses
Administration and Selling Costs
Depreciation
Interest paid
Profit before tax
Less: Taxation @ 30%
Profit after tax
Add back
~ Depreciation
~ Interest paid
Net operating cash flow
Capital investment
Working capital
Net cash flows
Discount factors at 6.43%
Present values

Workings

2011
0

------------------

2012
2013
2014
1
2
3

10,297,879
12,867,200
16,077,566
4,846,061
5,936,424
7,272,120
1,008,772
------------------ ------------------ -----------------4,443,047
6,930,776
8,805,446

2,196,180
2,240,104
2,284,906
1,140,000
1,140,000
1,140,000
680,000
680,000
680,000
------------------ ------------------ ------------------ -----------------426,866
2,870,672
4,700,540
128,060
861,201
------------------ ------------------ ------------------ -----------------426,866
2,742,612
3,839,339

1,140,000
1,140,000
1,140,000
680,000
680,000
680,000
------------------ ------------------ ------------------ -----------------2,246,866
4,562,612
5,659,339
(5,000,000)
(500,000)
(112,500)
(137,813)
(168,820)
------------------ ------------------ ------------------ -----------------(5,500,000)
2,134,366
4,424,799
5,490,519
1.000
0.940
0.883
0.829
------------------ ------------------ ------------------ -----------------(5,500,000)
2,006,304
3,907,097
4,551,641
------------------ ------------------ ------------------ ------------------

Year
Working capital ()
Incremental investment ()

2011
0
500,000
-

The decision on investment selection

Investment opportunity 1
Investment opportunity 2
Base case - with no investment

17,387,892
14,880,553
10,485,691

2012
1
612,500
(112,500)

2013
2
750,313
(137,813)

2014
3
919,133
(168,820)

2015
2016
4
5

9,283,200
9,563,553
4,455,936
4,590,505
------------------ -----------------4,827,264
4,973,047

2,425,236
2,498,478
890,000
890,000
480,000
480,000
------------------ -----------------1,032,028
1,104,569
288,484
309,608 One year in arrears
------------------ -----------------743,544
794,961

890,000
890,000
480,000
480,000
------------------ -----------------2,113,544
2,164,961
0.778
0.731
------------------ -----------------1,644,337
1,582,587
======== ========

2015

2016

NPV
10,485,691

2017

4
5
6

19,795,371
20,393,191
6,730,426
6,117,957
------------------ ------------------ -------------------------13,064,945
14,275,234
-

2,764,736
2,764,736
1,292,000
1,292,000
800,000
800,000
------------------ ------------------ -------------------------8,208,209
9,418,498
2,116,983
2,462,463
2,825,549 One year in arrears
------------------ ------------------ -------------------------6,091,226
6,956,035
(2,825,549)

1,292,000
1,292,000
800,000
800,000
------------------ ------------------ -------------------------8,183,226
9,048,035
(2,825,549)
1,098,500
------------------ ------------------ -------------------------8,183,226
10,146,535
(2,825,549)
0.779
0.732
0.689
------------------ ------------------ -------------------------6,374,733
7,427,263
(1,946,803)
------------------ ------------------ --------------------------

2015
4
1,098,500
-

2016
5
1,098,500

NPV
17,387,892

2015
2016
2017
4
5
6

20,088,919
20,088,919
8,908,347
8,908,347
------------------ ------------------ -------------------------11,180,572
11,180,572
-

2,330,604
2,377,216
1,140,000
1,140,000
680,000
680,000
------------------ ------------------ -------------------------7,029,968
6,983,356
1,410,162
2,108,990
2,095,007 One year in arrears
------------------ ------------------ -------------------------5,619,806
4,874,366
(2,095,007)

1,140,000
1,140,000
680,000
680,000
------------------ ------------------ -------------------------7,439,806
6,694,366
(2,095,007)
(206,805)
1,125,938
------------------ ------------------ -------------------------7,233,001
7,820,304
(2,095,007)
0.779
0.732
0.689
------------------ ------------------ -------------------------5,634,508
5,724,463
(1,443,460)
------------------ ------------------ --------------------------

NPV
14,880,553

2015
4
1,125,938
(206,805)

2016
5
1,125,938

Appendix 3 - Calculation of internal rate of return

Investment Opportunity 1 - Build new factory abroad
Year

Net cash flow

Discount at 20%
Present values

Net present values

2011
0
million

2012
1
million

2013
2
million

2014
3
million

2015
4
million

(6.50)
(2.16)
0.01
9.90
(2.77)
1.00
0.83
0.69
0.58
0.48
------------------ ------------------ ------------------ ------------------ -----------------(6.50)
(1.79)
0.01
5.74
(1.33)
------------------ ------------------ ------------------ ------------------ ------------------

(3.71)
------------------

IRR = R1 + (R2 - R1) x NPV 1

(NPV 1 - NPV 2)
IRR = 8.56% + (20% - 8.56%) x 6.60
6.60 - 2.59
Answer = 27.39%

Investment Opportunity 2 - Enter into the retail business

Year

Net cash flow

Discount at 20%
Present values

2011
0
million

2012
1
million

2013
2
million

2014
3
million

2015
4
million

(5.50)
(0.12)
(0.01)
(0.05)
(0.10)
1.00
0.83
0.69
0.58
0.48
------------------ ------------------ ------------------ ------------------ -----------------(5.50)
(0.10)
(0.01)
(0.03)
(0.05)
------------------ ------------------ ------------------ ------------------ ------------------

Net present values

(5.58)
------------------

IRR = R1 + (R2 - R1) x NPV 1

(NPV 1 - NPV 2)
IRR = 8.56% + (20% - 8.56%) x - 0.48
-0.48 + 2.01
Answer = 4.97%

2016
5
million

2017
6
million

0.22
0.22
0.40
0.34
------------------ -----------------0.09
0.07
------------------ ------------------

2016
5
million

2017
6
million

0.14
0.14
0.40
0.34
------------------ -----------------0.06
0.05
------------------ ------------------

Appendix 7 - Calculation of return on capital employed

Investment Opportunity 1 - Build new factory abroad

Year

Profit before interest & tax

2012
1
million
(0.40)

2013
2
million

2014
3
million

(0.40)

9.56

2015
4
million
(0.40)

Less: Capital investment .

Total accounting profit

Average annual accounting profit

Average investment
ROCE = (Average annual accounting profit / Average investment) x 100

Investment Opportunity 2 - Enter into the retail business

Year

Profit before interest & tax

2012
1
million
(0.25)

2013
2
million

2014
3
million

(0.25)

(0.25)

2015
4
million
(0.25)

Less: Capital investment .

Total accounting profit

Average annual accounting profit

Average investment
ROCE = (Average annual accounting profit / Average investment) x 100

2016
5
million
(0.40) =

Total
million
7.96

.
(8.04) included sunk cost & assume is capitalised
------------------.
(0.08)

(0.02) i.e.

(0.08) devided by

5 years

(6.25) devided by

5 years

.. 4.02
86.82

2016
5
million
(0.25) =

Total
million
(1.25)

.
(5.00)
------------------.
(6.25)

(1.25) i.e.

.. 2.50
27.20

Appendix 4 - Calculation of discounted payback

Investment Opportunity 1 - Build new factory abroad

Year

2011
0
million

2012
1
million

2013
2
million

2014
3
million

2015
4
million

PV of cash flows

(6.50)

(1.99)

0.01

7.72

(1.99)

Cumulative PV

(6.50)

(8.49)

(8.48)

(0.76)

(2.75)

Discounted payback period = 3 + (0.60 / 4.26) = 3 + 0.1 = 3.1 years

Investment Opportunity 2 - Enter into the retail business

Year

2011
0
million

2012
1
million

2013
2
million

2014
3
million

2015
4
million

PV of cash flows

(5.50)

(0.11)

(0.01)

(0.04)

(0.07)

Cumulative PV

(5.50)

(5.61)

(5.62)

(5.66)

(5.73)

Discounted payback period = 4 + (1.57 / 1.62) = 4 + 1.0 = 5 years

2016
5
million
0.15
(2.60)

2016
5
million
0.09
(5.64)

Appendix 5 - Calculation of undiscounted payback

Investment Opportunity 1 - Build new factory abroad

Year

2011
0

2012
1

2013
2

2014
3

2015
4

PV of cash flows

(6.50)

(2.16)

0.01

9.90

(2.77)

Cumulative PV

(6.50)

(8.66)

(8.65)

1.25

(1.52)

Discounted payback period = 2 + (4.61 / 5.60) = 2 + 0.8 = 2.8 years

Investment Opportunity 2 - Enter into the retail business

Year

2011
0
million

2012
1
million

2013
2
million

2014
3
million

2015
4
million

PV of cash flows

(5.50)

(0.12)

(0.01)

(0.05)

(0.10)

Cumulative PV

(5.50)

(5.62)

(5.63)

(5.68)

(5.78)

Discounted payback period = 4 + (0.28 / 2.45) = 4 + 0.1 = 4.1 years

2016
5

0.22
(1.30)

2016
5
million
0.14
(5.64)

Appendix 6 - Profitability index

Investment opportunity

Initial investment ( million)

8.00

5.00

Net present value ( million)

7.48

(4.55)

15.48

0.45

1.9

1.0

Ranking by NPV

Ranking by profitability index

PV of future cash flows ( million)

Profitability index