To place agenda regarding Strategic Acquisition African Eats before the board it was required to: i. To CALCULATE the net present value (NPV) of the…

CA Final · Integrated Business Solutions (Multidisciplinary Case Study) · MTP · November 2024
To place agenda regarding Strategic Acquisition African Eats before the board it was required to: i. To CALCULATE the net present value (NPV) of the proposed investment. While the nominal discount rate used by Doormato is 8% but considering risk nature of the project, 6% risk premium is required to be considered. Notes - (1) Taxation to be ignored in this calculation (2) PVF and exchange rates to be considered upto four decimal (3) final calculations to be rounded off the whole number.

Suggested Answer and Working Notes:

Calculation of NPV Year 0 1 2 3 Inflation factor in India 1.00 1.05 1.1025 1.1576 Inflation factor in Africa 1.00 1.10 1.21 1.331 Exchange Rate (as per IRP) 4.50 4.7143 4.9388 5.1741 Cash Flows in ₹'000 Real -1,00,000 -3,00,000 -4,00,000 -50,000 Nominal (1) -1,00,000 -3,15,000 -4,41,000 -57,880 Cash Flows in African Rand'000 Real -4,00,000 5,00,000 6,50,000 7,50,000 Nominal -4,00,000 5,50,000 7,86,500 9,98,250 In Indian ₹'000 (2) -88,889 1,16,666 1,59,249 1,92,932 Net Cash Flow in ₹'000 (1) + (2) -1,88,889 -1,98,334 -2,81,751 1,35,052 PVF@14% 1 0.8772 0.7695 0.6750 PV -1,88,889 -1,73,979 -2,16,807 91,160 NPV of Terminal value = 1,35,052/ 0.14 × 0.6750 = 6,51,144 (₹ ‘000) NPV of 3 years = -4,88,515 (₹ ‘000) Total NPV of the Project = -4,88,515 (₹ ‘000) + 6,51,144 (₹ '000) = 1,62,629 (₹ '000) Note: There can be a slight difference in exchange rate in 3 rd year. Accordingly, the final answer may be slightly varied.
Open in Interactive Practice Hub · Full Practice Hub · Chapter Weightage · More in this subject

Related Questions in this Topic