Payback and NPV

[Student in need]

Hi Everyone,

Im a student and am struggling with this financial accounting module, so thought id ask the experts!

Im having trouble with this, could anyone please help! I'll copy and paste the question and my income statement for the first year.

Perform ‘Pay Back’ and ‘Net Present Value’ calculations for the five year projections and discuss your evaluation of the proposed business using these appraisal methods. Use the total expenditure for the first year as the investment and 10% as the discount rate. It may be necessary to make additional assumptions and you need to state these clearly.
Income Statement Year 1

Sales/Revenue 225000
(Cost of Sales) 21900
Labour 18900
Fuel 3000
Gross Profit 203100
(Operating Expense) 47048
Rent 40000
Vehicle Insurance 2000
Public Liability Insurance 3000
Phone 648
Electricity 500
Stationary 100
Vehicle Maintenance 800
Operating Profit 156052
Finance Income 0
(Finance Expense) 7000
Profit Before Tax 149052
(Taxation) 20% 51429.6
Profit for Shareholders 97622.4


ANY help or advice would be greatly appreciated.

Thanks,

Jamie

 

[longnguyen87]

I am not an expert but will give it a try. In order to calculate Pay Back or NPV, you first need to figure out Cash Flow for each year.

One simple way of figuring out CF is by adding depreciation expense or other non-cash deduction back to Net Income. For example, if you have NI for each year at $45,000 and Depreciation Expense is $15000. Your CF for each year will be $45000+ 15000= 60000

I assume that NI and other expenses will be the same for the projection period, so CF from year 1 to 5 will be the same.

After you figure out CF for each year (and we assume that CF each year will be the same), to calculate payback period, you simply take the initial investment divide for CF. For example, if initial investment is $120,000 and CF is 60,000. Then payback period will be 2 years.

To calculate NPV, you can use financial calculator to do it when you have all the necessary numbers: Initial investment, CF each year, and required discount rate.

*** I cannot figure out what is the initial investment from all the numbers you provided above. But if you follow my instructions above, you will get the result. GL.