As part of working with an NGO in Uganda, a need was defined to deliver a water distribution system to several businesses in a village near the Nile in the town of Jinja. The cost would include a pre-filter and RO system, distribution piping, solar panels for power and inline testing analytics to ensure purity. The initial investment cost is expected to be $990,000 and will require $75,000 of working capital of which 80% will be recovered at the end of the business life when the process is shut down and will have a fully salable salvage value (Sequip) of $150,000. The business is expected to have an 8 year life and assumes straight line depreciation. The cost of sales (excluding depreciation) for the first 2 years of production are expected to be $20,000 with the balance of the years of business life costs decreasing by 5% each year due to focused lean improvement projects. Sales revenue paid by local businesses/homes) are projected to be $325,000 the first year with 10% growth per year through year 6 inclusive then flat sales for year 7 and 10% decrease for year 8. Assume a tax rate of 38%.
a) Compute the cash flows for each year.
b) With an effective interest rate of 16% what is the NPV?
c) What is the IRR% for this project?
d) Discuss whether or not this project should be pursued.