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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. Extract G £75m investm... 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
Payback Period
Answer
To calculate the payback period, we first need to determine the cumulative cash flows for each year:
- Year 1: -£75m (initial investment)
- Year 2: £20m (cumulative: -£55m)
- Year 3: £25m (cumulative: -£30m)
- Year 4: £22m (cumulative: -£8m)
- Year 5: £20m (cumulative: +£12m)
The payback period occurs after Year 3, as it takes exactly three years to recover the initial £75m investment.
Step 2
Net Present Value (NPV)
Answer
The NPV is calculated using the formula:
Where:
- is the cash inflow during the period t,
- r is the discount rate, and
- t is the number of time periods.
Applying the cash flows and the discount rates:
- Year 1: £(75) imes 1.0 = -75
- Year 2: £20 imes 0.909 = 18.18
- Year 3: £25 imes 0.826 = 20.65
- Year 4: £22 imes 0.751 = 16.53
- Year 5: £20 imes 0.683 = 13.66
Adding these values together:
This indicates a negative NPV, suggesting that the investment may not meet financial expectations.