Question 1

A company is considering an investment in an item of equipment costing

GH¢150,000. Contribution per unit is expected to be GH¢4 and sales are expected to be:
Year Units
1 20,000
2 40,000
3 60,000
4 20,000
Fixed costs are expected to be GH¢50,000 at today's price levels and the equipment can be disposed
of in year 4 for GH¢10,000 at today's price levels.
The inflation rate is expected to be 6% and the money cost of capital is 15%.
Required
Calculate the NPV of the project:
(a)using money cash flows and the money cost of capital
(b) using the real value of cash flows and the real cost of capital

Question 2
A company is considering an investment in an item of equipment costingGH¢150,000. The
equipment would be used to make a product. The selling price of the product at today's prices
would be GH¢10 per unit, and the variable cost per unit (all cash costs) would be GH¢6. The project
would have a four-year life, and sales are expected to be:
Year Units of sale
1 20,000
2 40,000
3 60,000
4 20,000
At today's prices, it is expected that the equipment will be sold at the end of Year 4 for GH¢10,000.
There will be additional fixed cash overheads of GH¢50,000 each year as a result of the project, at
today's price levels. The company expects prices and costs to increase due to inflation at the
following annual rates:
Items Annual inflation rate
Sales 5%
Variable costs 8%,
Fixed costs 8%
Equipment disposal value 6%.
The company's money cost of capital is 12%. Ignore taxation.
Required: Calculate the NPV of the project.