Question - Phone Ltd plans to open an outlet at a shopping mall. The investment requires an initial outlay of $90,000 which is expected to be financed through a bank loan. A discussion with the mall management reveals that a lease agreement for an outlet is for 5 years. Phone Ltd estimates the following data for the project. Inflation is expected to take effect from year 1.
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Initial outlay (for renovation and fixtures)
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$90,000.00
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Tax
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27.50%
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Cost of borrowings
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12.00%
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Annual sales
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$50,000.00
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Annual cost (excluding depreciation)
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$20,000.00
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Annual depreciation
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$18,000.00
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Inflation
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1.00%
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The company plans to maintain its prices regardless of the inflation. However, salaries and other costs are expected to grow in line with the inflation. Renovation and fixtures costs are to be depreciated on a straight line method with no residual (scrap) value at the end of the lease agreement.
Calculate the NVP and IRR.