Foresight Ltd plans an investment in fixed assets costing £120m. The project will have a three year life, with the predicted cash flows as:
|
Year 1 |
£55m |
|
Year 2 |
£71m |
|
Year 3 |
£45m |
Finance for inventories and debtors amounting to £75m will be required at the start of the project. Trade credit will provide £45m of this amount. All working capital will be recovered at the end of year 3. The expected scrap value of fixed assets at the end of year 3 is £15m. The cost of capital is 10 per cent. Taxation is to be ignored.
Required
(a) Calculate the net present value of the project.
(b) Show that the project can pay interest at 10 per cent per annum on the capital invested and return a surplus equivalent to the net present value calculated in (a).