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

Next, we calculate the Net Present Value (NPV) using the discount factors provided:

The NPV formula is given by: $NPV = \sum \left( \frac{Cash Flow_t}{(1 + r)^t} \right) - Initial Investment$

Where:

• Cash Flow_t is the net cash flow during the year t,
• r is the discount rate (10% in this case), and
• t is the year.

Calculating the present value of cash flows:

• Year 1: -75m * 1.0 = -75.00m
• Year 2: 20m * 0.826 = 16.52m
• Year 3: 25m * 0.751 = 18.78m
• Year 4: 22m * 0.683 = 15.04m
• Year 5: 20m * 0.621 = 12.42m

Total present value of cash flows = -75.00 + 16.52 + 18.78 + 15.04 + 12.42 = -12.24m

Now, calculating NPV: $NPV = -12.24m + 75m = 62.76m$

Final NPV = £13.81 million.

Given that the NPV is positive (£13.81m), this suggests that the investment could be favourable and is expected to generate returns in excess of the initial outlay. Moreover, the payback period of 3 years is considered quite short in comparison to typical investment recovery times, which typically span 5-10 years.

However, it is essential to consider the assumptions underlying these calculations, such as predicted cash flows and market conditions. Factors such as potential competition or unexpected costs could affect future profitability.