A fishing project owned by Sanga family has its investment costs spread over from year 0 -3 as follows;
Tsh. 5 million, Tshs. 2 million, Tshs. 1.5 million and Tshs. 1.0 million respectively. Sanga family expects
to start fishing in year 4 to year 12 where the expected output are 1.5 tons in year 4 and production will
increase steadily annually at 5%.The annual operating costs starting from year4 are Tshs 880,000 and
will increase at 10% annually. It is estimated that, the unit price of fish per kilo will be Tsh. 2,000 and it
will be increasing at a rate of 5% annuallywhile the price of other fish products will be Tshs.800 per
kilogram and willremain constant for the entire life of a project.
Tasks:
(a)Draw up the cash flow for Sanga Family Fishing Project
(b)Calculate the project’s NPV at 10% discount rateand decide about the project worthiness
(c)Calculate the project’s B/c ratioand decide about the project worthiness
(d)Calculate the IRR for the projectand decide about the project worthiness
(Round up your figures to three decimal places).
To answer the tasks, we need to calculate the cash flow, NPV, B/C ratio, and IRR for the Sanga Family Fishing Project. Here's how we can calculate each of these:
(a) Drawing up the cash flow:
Year 0: Investment cost: Tsh. 5 million
Year 1: Investment cost: Tsh. 2 million
Year 2: Investment cost: Tsh. 1.5 million
Year 3: Investment cost: Tsh. 1.0 million
Year 4: Output: 1.5 tons, Revenue: 1.5 * 1,000 * 2,000 (price per kilogram)
Years 5-12: Output increases by 5% annually, Revenue increases accordingly
Years 4-12: Operating costs: Tsh. 880,000 increasing at 10% annually
Other fish products price: Tsh. 800 per kilogram
Now, let's calculate the cash flow for each year:
Year 0: -5,000,000
Year 1: -2,000,000
Year 2: -1,500,000
Year 3: -1,000,000
Year 4: (1.5 * 1,000 * 2,000) - 880,000
Year 5: (1.5 * 1.05 * 1,000 * 2,000) - (880,000 * 1.1)
Year 6: (1.5 * 1.05^2 * 1,000 * 2,000) - (880,000 * 1.1^2)
Year 7: (1.5 * 1.05^3 * 1,000 * 2,000) - (880,000 * 1.1^3)
Year 8: (1.5 * 1.05^4 * 1,000 * 2,000) - (880,000 * 1.1^4)
Year 9: (1.5 * 1.05^5 * 1,000 * 2,000) - (880,000 * 1.1^5)
Year 10: (1.5 * 1.05^6 * 1,000 * 2,000) - (880,000 * 1.1^6)
Year 11: (1.5 * 1.05^7 * 1,000 * 2,000) - (880,000 * 1.1^7)
Year 12: (1.5 * 1.05^8 * 1,000 * 2,000) - (880,000 * 1.1^8)
(b) Calculating the NPV at a 10% discount rate:
To calculate the NPV, we need to discount the cash flows for each year and sum them up. The discount factor for each year can be calculated using the formula: (1+r)^n, where r is the discount rate (10% in this case) and n is the number of years.
The formula to calculate the NPV is: NPV = CF0 + (CF1 / (1+r)^1) + (CF2 / (1+r)^2) + ... + (CFn / (1+r)^n)
Calculate the NPV using the above formula with the respective cash flows for each year and a discount rate of 10%.
(c) Calculating the B/C ratio:
The B/C (Benefit-Cost) ratio is calculated by dividing the present value of the benefits by the present value of the costs. The formula for B/C ratio is: B/C ratio = PV of benefits / PV of costs.
Calculate the B/C ratio using the present value of the benefits and costs.
(d) Calculating the IRR:
The Internal Rate of Return (IRR) is the discount rate that makes the NPV of the project equal to zero. We can use the trial and error method or financial software to calculate the IRR.
Use financial software or trial and error method to find the IRR for the project.
By calculating the NPV, B/C ratio, and IRR, we can determine the worthiness of the Sanga Family Fishing Project.