Reference no: EM132745456

Backward planning Limited is considering whether to invest in a project which would entail immediate expenditure on capital equipment of Rs. 80 000. Expected from sales from the projects are as follows.

Probability         Sales volume

0.10                         2000
0.25                       6000
0.40                       18000
0.15                        10000
0.10                         14000

• Once sales are established at a certain volume in the first year, they will continue at the same volume in subsequent years.
• The unit selling price will be Rs. 12, the unit variable cost Rs. 6 and the additional fixed cost will be Rs. 20000 (all cash items) the project would have a life of 6 years after which the equipment would be sold as scrap which would fetch Rs. 8000.

Problem 1: You are required to find - (1) expected value of NPV of the project (2) minimum volume of sales per annum required to justify the project.

Cost of capital of the company is 10%. Discount factor of Re.1 per annum for 6 years at 10% is 4.355 and the discount factor of Re. 1 at the end of 6th year at 10% is 0.5645