1.
Comparison of the future cash flow to the initial cost of investment
2. 10.2328 + 1.2618 = 11.495m
3. NPV=$11.4932m-$6m=$5.4932m
4. (5.5/8)/6 =0.115 = 11.5%
2 x 8 = 16 -6 =10m
(16/8)6 = 0.333
1/(6x8) = 0.208
5. 1.3612+1.2618+1.167+1.0806=4.8706+1=5.87
6. Helps spread costs with more flexible cash flow, and pursue more opportunities, and
projects for short term and long term reasons.
Solar Soccer Academy Ltd. (SSA) is a private limited company set up five years ago by
Stephen Murdock. It provides top-quality soccer (football) skills and technique coaching.
So far, SSA has been a success, and Stephen is deciding whether to open another
academy in a neighboring city.
The cost of building a second academy is $500 000. Stephen has produced forecasted
financial information for the second academy’s first five years of operation (see Table 1).
Table 1: Forecasted financial information for a second academy
Stephen estimates cash outflow to be 25 % of the total cash inflow in years 1, 2 and 3
and 20 % of the total cash inflow in years 4 and 5.
Table 2: Discount rates
b. Using Table 1 and other information provided, calculate for SSA’s second
academy, the payback period (show all your working). [2]
2 years and 7 months
c. Using Table 1 and other information provided, calculate for SSA’s second
academy, the average rate of return (ARR) for the first five years of operation
(show all your working). [2]
d. Using Table 1 and other information provided, calculate for SSA’s second
academy, the net present value (NPV) at a discount rate of 4 % (see Table 2)
(show all your working). [2]
e. Explain one disadvantage for SSA of only using the payback period method in
making its decision to open a second academy. [2]
