Papaye Restaurant plans to invest in one of two animal farming business with a Ghc 1 million loan sourced from Ecobank. Investing in Pig farming will cost 105,000 while the poultry business will cost Ghc100,000. The pig farming business has a lifespan of 5 years while the poultry farm will last for 6 years. The poultry cage would be sold for a scrap which will fetch Steve Ghc 40000. The year end cash flows from the two farms are shown in the table below.Period123456Pig farming2500045000400002000019000Poultry farming300005000050000500002700032,000Assume interest rate to be 5 percentWhat is the Net Present Value for the pig farming business at interest rate of 5 percent? GHC Blank 1. Fill in the blank, read surrounding text.
Question
Papaye Restaurant plans to invest in one of two animal farming business with a Ghc 1 million loan sourced from Ecobank. Investing in Pig farming will cost 105,000 while the poultry business will cost Ghc100,000. The pig farming business has a lifespan of 5 years while the poultry farm will last for 6 years. The poultry cage would be sold for a scrap which will fetch Steve Ghc 40000. The year end cash flows from the two farms are shown in the table below.Period123456Pig farming2500045000400002000019000Poultry farming300005000050000500002700032,000Assume interest rate to be 5 percentWhat is the Net Present Value for the pig farming business at interest rate of 5 percent? GHC Blank 1. Fill in the blank, read surrounding text.
Solution
To calculate the Net Present Value (NPV) for the pig farming business, we need to discount each year's cash flow back to its present value and then sum these up. The formula for NPV is:
NPV = ∑ [Cash inflow / (1 + r)^n] - Initial Investment
where:
- Cash inflow is the cash flow for each year
- r is the discount rate (interest rate)
- n is the year
Let's calculate:
Year 1: 25000 / (1 + 0.05)^1 = 23809.52 Year 2: 45000 / (1 + 0.05)^2 = 40816.33 Year 3: 40000 / (1 + 0.05)^3 = 34722.02 Year 4: 20000 / (1 + 0.05)^4 = 16402.87 Year 5: 19000 / (1 + 0.05)^5 = 14824.56
Adding these up, we get a total present value of cash inflows of 130575.3
The initial investment for the pig farming business is 105,000.
So, the NPV = 130575.3 - 105,000 = 25575.3
Therefore, the Net Present Value for the pig farming business at an interest rate of 5 percent is GHC 25575.3.
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