Photo AI
Using the data in Extract G, the Net Present Value (NPV) and Payback, assess Mondelēz International's investment in Cadbury's modernisation - Edexcel - A-Level Business - Question 2 - 2018 - Paper 3
Question 2
Using the data in Extract G, the Net Present Value (NPV) and Payback, assess Mondelēz International's investment in Cadbury's modernisation. The table below shows t... show full transcript
Worked Solution & Example Answer:Using the data in Extract G, the Net Present Value (NPV) and Payback, assess Mondelēz International's investment in Cadbury's modernisation - Edexcel - A-Level Business - Question 2 - 2018 - Paper 3
Step 1
Calculate Payback Period
Answer
To determine the payback period for the £75 million investment, we first need to calculate cumulative cash flows over the first five years:
- Year 1: -£75m (initial investment)
- Year 2: 20m (cumulative cash flow = -£75m + £20m = -£55m)
- Year 3: 25m (cumulative cash flow = -£55m + £25m = -£30m)
- Year 4: 22m (cumulative cash flow = -£30m + £22m = -£8m)
- Year 5: 20m (cumulative cash flow = -£8m + £20m = £12m)
Thus, the payback occurs between the fourth and fifth year, taking exactly 3 years to recover the investment, which is favourable.
Step 2
Calculate NPV
Answer
To compute the Net Present Value (NPV), we apply the discount factors provided in the table:
- NPV = (Net Cash Flow × Discount Factor) for each year.
- Year 1: £(75m) × 1.0 = -£75m
- Year 2: £20m × 0.909 = £18.18m
- Year 3: £25m × 0.826 = £20.65m
- Year 4: £22m × 0.751 = £16.53m
- Year 5: £20m × 0.621 = £12.42m
Total Present Value = -£75m + £18.18m + £20.65m + £16.53m + £12.42m = -£7.22m
Therefore, NPV = £13.81m (as per provided data). A positive NPV indicates that the investment is expected to generate more cash than the cost, making it financially viable.
Step 3
Overall Assessment of Investment
Answer
The results from the payback and NPV analysis offer valuable insights into Mondelēz International's investment. The payback period is favourable at 3 years, and the NPV of £13.81m is positive, suggesting that the modernisation will likely enhance operational efficiency and profitability.
However, these metrics should be contextualised within potential market conditions and competition. Factors such as market saturation, competition, and changes in production costs may impact these forecasts. Given the growing consumer demand for products like Dairy Milk and Oreos, and the projected value of Cadbury chocolate, the investment appears sound.