Investment Decision Duncombe Village Golf

Investment Decision

Duncombe Village Golf Course in considering the proposed investment of $1,200,000 for new equipment must utilize capital budgeting techniques. Of the four methods of analyzing the return on investment of a purchase: payback, accounting rate of return, internal rate of return, and net present value the two latter are superior choices because they recognize that "money does have value over time" (Marshall, D. & McManus, W. 1996). In this particular scenario the cost of capital is provided at eight percent and therefore use of the net present value method is the most appropriate.

At the outset some terminology is in order; the cost of capital is the discount rate which is used to calculate the net present value of the future stream of cash flows from years one through four. Each period cash flow will be discounted using the eight percent factor and then the sum of those cash flows will be compared to the investment required to determine if the project is profitable.

Using values found in a table of factors for calculating the present value of a dollar; the periods one through four have the following present value factors:

Year One= .9259

Year Two= .8573

Year Three= .7938

Year Four= .7350

Next these factors are multiplied individually by the net cash flow generated by the investment in each period.

Year One= $500,000

Year Two= $450,000

Year Three= $350,000