Can you please give detailed solution Gisi Limited is considering an investment
ID: 2566267 • Letter: C
Question
Can you please give detailed solution
Gisi Limited is considering an investment proposal that requires an initial outlay of $50,000. The investment has an estimated useful life of 5 years after which it is expected to realise $5,000 as a residual value. The net operating cash flows of the investment are expected to be $16,000 in each of the five years. Gisi Ltd’s weighted average cost of capital (WACC) is 14%.
Advise Gisi Limited whether or not they should precede with the investment proposed, showing appropriate calculations to support your answer.
Explanation / Answer
Answer:
Initial Outlay =$50,000
estimated useful life = 5 years
Residual Value =$5,000
cash flows of the investment are expected to be $16,000 in each of the five years.
weighted average cost of capital (WACC) is 14%
For deciding whether Gisi Limited should precede or not with the investment we need to calculate NPV
Calculation of the NPV
Year
Cash
Flow
Pv
facot at 14%
Present
value
A
B
C=B*A
0
-50,000
1
-50000
1
16000
0.8771
14033.6
2
16000
0.7694
12310.4
3
16000
0.6749
10798.4
4
16000
0.5921
9473.6
5
16,000
0.5194
8310.4
5
5,000
0.5194
2597
NPV
7523.4
Or you can find it in other way also
Year
Cash
Flow
Pv
factor at 14%
Present
value
A
B
C=B*A
0
-50,000
1
-50000
1 to 5
16000
3.433
54928
5th year
5000
0.519
2595
7523
Conclusion:
As the NPV of the project is positive so Gisi Limited should precede with the investment proposed
Year
Cash
Flow
Pv
facot at 14%
Present
value
A
B
C=B*A
0
-50,000
1
-50000
1
16000
0.8771
14033.6
2
16000
0.7694
12310.4
3
16000
0.6749
10798.4
4
16000
0.5921
9473.6
5
16,000
0.5194
8310.4
5
5,000
0.5194
2597
NPV
7523.4