Contr = 120 800 x 35 = 4228000 120800 x 37.1 = 4481680
Demand
300000-3200 x 56 =120 800
b) At a price of $57
Demand
3000000-3200 x 57 = 117600
Plan 1 Plan 2
Contribution Margin Contribution Margin
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(57-17-4) (57-17-1.9)
= 36 = 38.1
Contr = 117600 x 37 = 4233600 120800 x 37.1 = 4480560
1) Calculation of NPV
Present Value of cash inflows – Present value of cash outflows
Contribution Margin 4481680
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Less Fixed cost
Less Advertising Cost (460000)
4021680
Add cost saving from advertisement 46000
4067680
Present value factor
At 10% for 5 years 0.6209
Present value of cash flows 2525709.247
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at a very reasonable price
Less initial outlay 1500000
NPV 1025709.247
The project is viable since it has a positive NPV OF 1055709.247
2) Payback
Payback = Total outlay
Total inflows
= 1500000 x 12 months
4481680
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= 4 Months
This project is viable since it has a payback of 4 months
3) ARR- Accounting Rate of Return
Average Profit
Average investment
Average Profit = 4021680 Average investment = 1500000
2 2
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ARR = 2010840 =2.68112
750000
The project is viable since the returns are 2.6 times the investment
4) Internal Rate of Return
LDR + (HDR-LDR) X (NPV of LDR – NPV OF HDR)
(NPV of LDR – NPV of HDR)
We usually take a higher rate that can give us a higher rate or a negative NPV. In this case we assume 30 %
Present value = (1 + r)n = (1 + 0.3)n = 0.269
We assume another rate which can give us a higher NPV than 10%. We assume 5% in this case
PVIF = (1 + r)-5 = 0.783
Under 30% Under 5%
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Total Savings 4067680 4067680
PVIF X 0.269X 0.783
1094205.923184993
Less initial Outlay (1500000) (1500000)
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405794.08 1684993.44
Lower Discounting Rate LDR = 5%
Required Discount Rate = 10%
Higher Discount Rate HDR = 30%
5 + (30 -5) X (1684993.44-1025709.247)
(1684993.44 + 405794.08)
IRR = 20.11%
This means that the project is viable since the internal rate of return is 20.11% which is higher than the required rate of return of 10%. (Cost of capital)
