Estimate the Net Present Value for the above project showing all necessary calculation. (Workings)
Approximately materials that are sold yearly is 2000 units, materials per unit cost £80.00
Therefore: £80.00 x 2000 = £160,000

Direct labour expenses £80.00 per unit
Accordingly: £80.00 x 2000 = £160,000

Allocated overheads are £100 per unit
Hence: £100.00 x 2000 = £200,000

Revenue is determined by the selling price expanded by 2000, which is the number of units sold
So 2000 x £400.00 = £800.00

Cash flow for each year
Year 0 - the initial outlay is the total cost for franchise, equipment and Monty Partners, which is: £300,000 + £150,000 + 100,000 = -£550,000

Year 1 - the expenses is the sum of Advertising, Fixed Costs, Materials, Direct Labour and Allocated Overheads, which is: £100,000 + £80,000 + £160,000 + £160,000 + £200,000 = £700,000
Cash flow is the total of Expenses, Revenue minus the Working Capital: -£700,000 + £800,000 - £200,000= -£100,000

Year 2-9 – the expenses are the same as year 1but the cash flow varies, which is: £100,000 + £80,000 + £160,000 + £160,000 + £200,000 = £700,000
Cash flow is calculated by expenses and revenue: -£700,000 + £800,000 = £100,000

Year 10 - the expenses are the duplicate as to year 1 whereas the cash flows workings are different. It consists of total expenses, revenue, scrap value and working capital. -£700,000 + £800,000 + £1,000,000 + £200,000 = £1,300,000

The discount factor is 15% and this is divided by the calculations mentioned above. Below are the workings for the 10 years

Discount factors

Year Calculation + Discount factor
0 1
1 1 / 1.15 = 0.869 = 0.87
2 1 / 1.15^2 = 0.756
3 1 / 1.15^3 = 0.658
4 1 / 1.15^4 = 0.572
5 1 / 1.15^5 = 0.497
6 1 / 1.15^6 = 0.432
7 1 / 1.15^7 = 0.376
8 1 / 1.15^8 = 0.327
9 1 / 1.15^9 = 0.284
10 1 / 1.15^10 = 0.247

Discount cash flow
Year