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. Extract G £75m investme... 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 analyze the cumulative cash flows:
- Year 1:
- Net cash flow: £(75m)
- Cumulative: £(75m)
- Year 2:
- Net cash flow: £20m
- Cumulative: £(55m)
- Year 3:
- Net cash flow: £25m
- Cumulative: £(30m)
- Year 4:
- Net cash flow: £22m
- Cumulative: £(8m)
- Year 5:
- Net cash flow: £20m
- Cumulative: £12m
From this, it takes exactly 3 years to pay back the £75m investment.
Step 2
Net Present Value (NPV)
Answer
We compute the NPV using the discount factors from the table:
Year 1: £20m * 0.909 = £18.18m
Year 2: £25m * 0.826 = £20.65m
Year 3: £22m * 0.751 = £16.53m
Year 4: £20m * 0.683 = £13.66m
Total DCF = £18.18m + £20.65m + £16.53m + £13.66m = £68.02m
NPV = Total DCF - Initial Investment
NPV = £68.02m - £75m = £13.81m
Thus, the NPV is positive at £13.81m.
Step 3
Evaluation
Answer
The investment is favorable as it has a positive NPV, which indicates that the project is likely to add value to Mondelēz International. In addition to financial considerations, the investment supports workforce development through training and skill enhancement, catering to the growing market demand.
However, attention should be given to external factors, such as market competition and potential risks in the chocolate production sector. An assessment of the broader strategic context is also crucial, especially in light of Cadbury's brand valuation and market position.