Investment Decision Analysis scenario for Duncombe Village Golf Course
Table 1.1 Excel table showing the NPV and IRR
The net present value expected from the investment amounts to $161,816.27. The net present value gives the projected difference in present value of cash inflows, and the expected present value of cash outflows (Maher, Stickney, & Weil, 2012). If the figure of the net present value obtained is positive, then this is an indication that projected earnings associated with a project exceed the projected costs of the same. The net present value concept dictates that firms should only invest in those projects that give positive net present values. From the analysis, Duncombe Village Course should purchase the new equipment since there will be positive returns from the investment. From the analysis, it is possible to determine the profitability index. The profitability index of the investment can be obtained by dividing the obtained figure of the present value of inflows by the initial cost of the investment. From the analysis, the profitability index is 0.13. This means that for every dollar invested in the project yields an additional $0.13 in present value inflows.
It is also important to consider the internal rate of return expected from the project. The internal rate of return (IRR) is defined as the return rate that when applied to a particular project makes the net present value of the cash flows equal to zero (Maher, Stickney, & Weil, 2012). The IRR is also a good measure of profitability. From the excel analysis, the IRR is 14%, using a value of 0.10. The IRR obtained is more than the cost of capital. This means that investment in the project will be profitable. Duncombe Village Course will thus derive benefits from investing the purchase of new equipment.
Maher, M. W., Stickney, C. P., Weil, R. M. (2012). Managerial accounting: An introduction to concepts, methods and uses. Boston: Cengage Learning.
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