Determine the approximate payback period, Finance Basics

Assignment Help:

The business plan for a new company that has obtained a 5 year lease for operating a local bus service is shown below. Items marked with an asterisk represent continuous cash flows, however it can be assumed that they are made monthly in arrears.

Cashflow Item	Timing	Amount (thousands)

Initial set up costs	Immediate	-150
Fees from advertising contracts	1 month	+200
Purchase of vehicles	3 months	-2,000
Fares from passengers*	From 3 months onwards	+1,200 pa
Staff costs and other operating costs*	From 3 months onwards	-480 pa
Resale value of assets	5 years	+575

You may assume that the project is financed by a loan facility based on an effective annual interest rate of 9% per annum, and interest (and any repayments of capital) is due and paid annually in arrears.

The company has a choice of paying only the interest on the loan or can repay some the loan with the interest payments. Please give a reason for your choice of interest only or with loan repayments.

Any surplus funds that the company has each year, in excess of the interest due on the loan can be invested and earns interest at the rate of 5% per annum payable half yearly.

(a) Set up a spreadsheet using Excel showing all cash flows for the term of the lease. You may want to show cash flow from the business and interest (and loan repayments separately.

(b) What is the approximate payback period?

Related Discussions:- Determine the approximate payback period

Write Your Message!

Name

Email id

Message

Verfication Code

User Account

All Pages