Duncombe Village Golf Course is considering the purchase of
new
equipment that will cost $1,250,000 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?
| Year | Cash receipts | Cash disbursements | Net Cash Flow |
| 1 | 950,000 | 500,000 | 450,000 |
| 2 | 925,000 | 475,000 | 450,000 |
| 3 | 800,000 | 450,000 | 350,000 |
| 4 | 675,000 | 430,000 | 245,000 |
| Calculation of NPV | |||
| Years | Net Cash Flows | Dicount Factor @ 8% | Present Value |
| 0 | -$12,50,000 | 1.00 | -$12,50,000 |
| 1 | $4,50,000 | 0.9259 | $4,16,667 |
| 2 | $4,50,000 | 0.8573 | $3,85,802 |
| 3 | $3,50,000 | 0.7938 | $2,77,841 |
| 4 | $2,45,000 | 0.7350 | $1,80,082 |
| NPV= | $10,393 |
NPV is the difference between present value discounted at cost of capital and the initial investment.
SInce NPV is positive for the given equipment, Duncombe should go ahead with the decision to purchase the equipment.
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