IB BM HL 3.8.2 Net present value

[Maximum number: 4]

Urban Express Ltd. (UE), a private limited company, owns and operates city buses in an economically unstable country. Interest rates are forecasted to increase in the next few years. The government of the country has approached UE to set up a public- private partnership (PPP) to purchase electric buses.

Urban Express (UE)
Urban Express Ltd. (UE), a private limited company, owns and operates city buses in an economically unstable country. Interest rates are forecasted to increase in the next few years. The government of the country has approached UE to set up a public-private partnership (PPP) to purchase electric buses. UE has forecasted the following annual net cash flows for UE's first purchase of electric buses.

Table 2: Forecasted annual net cash flows for UE's first purchase of electric buses

$Table 3: Discount rates at 8\%$

Table 3: Discount rates at 8\%

(a)

Using Table 2 and Table 3, calculate the net present value (NPV) at a discount rate of 8 % (show all your working).

[ 2 ]

Using the discount table:

Year	Net cash flow ($)	Discount factor at 8%	Present value ($)
1	2200000	0.9259	2036980
2	1800000	0.8573	1543140
3	2400000	0.7938	1905120
4	1100000	0.7350	808500

Total present value = $\$6293740$ .
NPV = TPV - capital cost.
NPV = $\$6293740$ - $\$5000000$ = $\$1293740$ .

Alternative presentation:

Year	Net cash flow ($)	Discount factor at 8%	Present value ($)
0	(5000000)	1	(5000000)
1	2200000	0.9259	2036980
2	1800000	0.8573	1543140
3	2400000	0.7938	1905120
4	1100000	0.7350	808500
NPV			$\$1293740$

N.B. Allow candidate's own figure rule (OFR).
Award [1] for correct working and [1] for the correct answer.
Award up to a maximum of [2].
Award up to [1] if TPV is correctly calculated but NPV is omitted.
Deduct [1] if either the $ sign is missing (unless already in table heading or working) OR units such as 000's are not specified.
Accept any other method of calculation.

(b)

Explain one factor that may have influenced UE's choice of the discount rate of 8 %.

[ 2 ]

IB Business Management HL 3.8.2 Hl Net Present Value Questions question 1

Question (a)

Question (b)