Question: QUESTION 3 (30 MARKS) NPP plc uses Net Cash flows from operations to evaluate investment projects. The company provides domestic services for Ghana Universities. The
QUESTION 3 (30 MARKS)
NPP plc uses Net Cash flows from operations to evaluate investment projects. The company provides domestic services for Ghana Universities. The company intends to invest 420,000 to purchase domestic services equipment and vehicles. The equipment and vehicles have a life of five years and are likely to generate operating net cash flows. Estimates for each year are independent of other years. The business has a cost of capital of 15 per cent. Below is information to help you to estimate the Net Cash flows from operation and their probability of occurrence are set out below.
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| Net Profit Before Interest and Tax | Probability | Depreciation/ Impairment Loss | Loss/ Profit on Sale | Change in Inventory |
| Year 1 | 95,000 | 0.3 |
| 14,000 |
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| Year 1 | 120,000 | 0.4 | 8,000 |
| (17,000) |
| Year 1 | 105,000 | 0.3 |
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| Year 2 | 90,000 | 0.3 |
| 17,000 |
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| Year 2 | 137,000 | 0.4 |
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| 10,000 |
| Year 2 | 110,000 | 0.3 | 18,000 |
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| Year 3 | 129,000 | 0.4 |
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| Year 3 | 135,000 | 0.3 |
| 12,000 |
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| Year 3 | 138,000 | 0.3 | 10,000 |
| (9,000) |
| Year 4 | 85,000 | 0.4 |
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| Year 4 | 80,000 | 0.4 | 6,000 |
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| Year 4 | 125,000 | 0.2 |
| (17,000) | 12,000 |
| Year 5 | 85,000 | 0.2 |
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| Year 5 | 89,000 | 0.5 | 18,000 |
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| Year 5 | 65,000 | 0.3 |
| (10,000) | 17,000 |
REQUIRED TO:
- Calculate the expected net present value (ENPV) of NPP plc domestic services and advise the management of the company whether they should buy the machines or not (18marks)
Calculate the net present value (NPV) of the worst possible outcome and the probability of its occurrence. Discuss why cash flows rather than profit flows are used in investment appraisal? (12marks)
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