Quiz 22: Montclair-The Aplline

Business

1. Five year financial forecast for the project is given below: img Notes: • Sales is calculated as follows: img • All cash cost would probably grow 4% each year from inflation. • Tax is calculated as 35% on profit.

Calculation of IRR, NPV, and Payback: (i) Initial investment in the project made $1,300,000. NPV is calculated as follows : img img NPV calculated is $61,585 which is positive. This means that the project is profitable. (ii) IRR stands for internal rate of return. Internal rate of return (IRR) is that the rate of return at which the NPV from the above investments will become zero. It is used to compare one investment to another. img For IRR calculation: Assume: IRR is 13% NPV at 13% is calculated $131,795. Assume: IRR is 17% NPV at 17% calculated is ($3,145.83) IRR is calculated as follows: img Hence, IRR for the project is 16.91%. (iii) Payback for the project is calculated as follows: img Payback period is calculated as follows : img img number of years before the payback year in this case Y is 3 img remaining to be paid in order to make cumulative cash flow 0 in this case A is $282,467. img Payback amount in entire payback year in this case the amount is $331,680 img img Hence, the payback period is 3.851.

Explanation: • According to officer of Navy, $25 price is very competitive price, for five-year fixed term of the contract. • Navy auditor should audit the five-year financial forecast given by the MMS. Financial forecast reveals that MMS Company would earn optimum for all the 5 years. Navy can negotiate from the MMS for price. • Therefore, Navy should compare the price with the competitor firm. Then it can be concluded whether proposal is good deal for the company or not.