Analyze the following scenario: Duncombe Village Golf Course is considering the
ID: 2777283 • Letter: A
Question
Analyze the following scenario:
Duncombe Village Golf Course is considering the purchase of new equipment that will cost $1,200,000 if purchased today and will generate the following cash disbursements and receipts. Should Duncombe pursue the investment if the cost of capital is 8 percent? Why? Clearly label your calculations in your analysis.
Year
Cash Receipts
Cash Disbursements
Net Cash Flow
1
1,000,000
500,000
500,000
2
925,000
475,000
450,000
3
800,000
450,000
300,000
4
750,000
430,000
320,000
Year
Cash Receipts
Cash Disbursements
Net Cash Flow
1
1,000,000
500,000
500,000
2
925,000
475,000
450,000
3
800,000
450,000
300,000
4
750,000
430,000
320,000
Explanation / Answer
NPV = -Initial Investment + Year 1 cash flow/(1+Kc) + Year 2 cash flow/(1+Kc)^2+ Year 3 cash flow/(1+Kc)^3+ Year 4 cash flow/(1+Kc)^4
NPV = - 1200000 + 500000/1.08 + 450000/1.08^2 + 300000/1.08^3 + 320000/1.08^4
NPV = $ 122,124.66
Decision : Duncombe should pursue the investment if the cost of capital is 8 percent because its NPV is positive , therefore the project is viable