LIAM LTD is considering a new investment in Castries. The investment has an initial cost of $300,000.

LIAM LTD is considering a new investment in Castries. The investment has an initial cost of $300,000. The sales revenues of the investment are $120,000 in year 1, $135,000 in year 2, $140,000 in year 3, $105,000 in year 4, and $100,000 in year 5. In each year, the operating costs are 20 per cent of the sales. The changes in net working capital are as follows: $11,000 in year 0, $3,000 in year 1, £$,000 in year 2, -$4,000 in year 3, -$2,000 in year 3, and -$10,000 in year 5, so that net working capital is fully recovered at the end of the project. The corporate tax rate is 30%, and the investment is depreciated using the straight-line method. The investment is sold at the residual value of $150,000 after depreciation at the end of the 5 years. 

a) Calculate the Earnings Before Interest and Taxes (EBIT) in each year, from year 1 to year 5. 

b) Calculate the Operating Cash Flows (OCF) in each year, from year 1 to year 5. 

c) Calculate the Net Cash Flows (NCF) in each year, from year 0 to year 5. 

d) Calculate the Net Present Value (NPV) at the discount rate of 12 per cent.

e) Suppose that the relevant discount rate increases to 19 per cent. Which conclusions can you derive by comparing the results obtained in points d) and e)? 

ParticularsYear oYear 1Year 2Year 3Year 4Year 5sales20 000.005 135 , 090.005 140 , 000 .00 5 105 0 00.00 5 100 000.00Less : Opreating cost 20 %4, 900.00 / S27 090 0028. 0 00.00 IS21…







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