|
Discount rate |
10% |
||||||
|
Project |
Year 0 |
Year 1 |
Year 2 |
Year 3 |
Year 4 |
Year 5 |
Total |
|
Costs |
$50,000 |
$10,000 |
$10,000 |
$10,000 |
$10,000 |
$10,000 |
|
|
Discount factor |
1 |
0.909 |
0.826 |
0.751 |
0.683 |
0.621 |
|
|
Discounted costs |
$50,000 |
$9,091 |
$8,264 |
$7,513 |
$6,830 |
$6,209 |
$87,908 |
|
Year 0 |
Year 1 |
Year 2 |
Year 3 |
Year 4 |
Year 5 |
Total |
|
|
Benefits |
$0 |
$40,000 |
$40,000 |
$40,000 |
$40,000 |
$40,000 |
$200,000 |
|
Discount factor |
1 |
0.909 |
0.826 |
0.751 |
0.683 |
0.621 |
|
|
Discounted benefits |
$0 |
$36,364 |
$33,058 |
$30,053 |
$27,321 |
$24,837 |
$151,631 |
|
NPV |
$63,724 |
i.e. total discounted benefits-total discounted costs |
|
Discounted benefits |
$151,631 |
|
|
Discounted costs |
($87,908) |
|
|
ROI |
72% |
|
Particulars |
Year 0 |
Year 1 |
Year 2 |
Year 3 |
Year 4 |
Year 5 |
|
Discounted benefits-costs |
($50,000) |
$27,273 |
$24,793 |
$22,539 |
$20,490 |
$18,628 |
|
Cumulative benefits-costs |
($50,000) |
($22,727) |
$2,066 |
$24,606 |
$45,096 |
$63,724 |
|
So, by the above we can know that the payback period is between year 4 and 5 |
||||||
|
Payback period = No. of years before first positive cumulative cash flow + (Absolute value of last negative cumulative cash flow / Cash flow in the year of first positive cumulative cash flow) |
Therefore,
|
Payback period = |
4.917 |
|
which is approx to |
5years |
|
Hence, the company will break even at 5years |
In the given scenario, there is a responsibility to launch a new website for a local non-profit organization. There may be several costs, which may be one-time or recurring in nature. Hence, all the costs and benefits must be known and calculated effectively.
The objective of the scenario is to calculate whether the launching of the product is cost effective or not. There are various requirements to be fulfilled while checking the viability of a project (Robinson & Burnett, 2016). Thus, the net present value must be calculated which must be positive as a negative figure represents the failure of a project (Kashyap, 2014).
The return on investment must be positive and the break-even analysis must be done to know whether the project is able to get back or recover its initial outflow (Hayward et al., 2016). Thus, the beneficial capacity of the project must be known from the calculation of the above factors (Abor, 2017).
The net present value is $63,724, which is a positive figure, making the project viable. The ROI is 72% making the project a beneficial one. As per the analysis of payback or break even, we can conclude that the initial amount can be recovered by 5years after the start of the project.
Conclusion
The manager must undertake the project, as there are no negative factors.
References
Abor, J. Y. (2017). Evaluating Capital Investment Decisions: Capital Budgeting. In Entrepreneurial Finance for MSMEs (pp. 293-320). Springer International Publishing.
Burns, R., & Walker, J. (2015). Capital budgeting surveys: the future is now.
Götze, U., Northcott, D., & Schuster, P. (2015). Capital Budgeting and Investment Decisions. In Investment Appraisal (pp. 3-26). Springer Berlin Heidelberg.
Hayward, M., Caldwell, A., Steen, J., Gow, D., & Liesch, P. (2016). Entrepreneurs’ Capital Budgeting Orientations and Innovation Outputs: Evidence From Australian Biotechnology Firms. Long Range Planning.
Kashyap, A. (2014). Capital Allocating Decisions: Time Value of Money. Asian Journal of Management, 5(1), 106-110.
Robinson, C. J., & Burnett, J. R. (2016). Financial Management Practices: An Exploratory Study of Capital Budgeting Techniques in the Caribbean Region.
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