NPV and Discounted Payback Period

NPV and Discounted Payback Period

PART A: Individual Component (5%)

This is a research assignment and requires the use of independent, academic research. In your group
assignment you have been asked to use Net Present Value analysis to analyse Beaver Tales Pty Ltd.
Why would a financial manager feel more confident using NPV analysis than the discounted payback
period method? Is there potentially a better method to undertake such an analysis?

You will be assessed on the following criteria:

1. Strength and relevance of arguments presented. This will include the persuasiveness (including
   breadth and depth) of the arguments presented. Any material needs to be structured in a logical manner

to enhance your arguments. (3 marks)

2. Depth and Quality of research undertaken to support your arguments (1 marks)
3. Grammar, spelling and referencing style (1 Marks) Assignments should be succinct in their language

and arguments.

You are required to submit the following:

1. You are required to submit an assignment of no more than 300 words by the due date. Any words

beyond this limit will not be marked.

2. You are required to display the word count on the front page of your assignment.
3. You are expected to submit a file using 12-point double spaced Arial font.
4. You are encouraged to research this topic well in advance of preparing to write your submission.

NPV and Discounted Payback Period 2

5. You are required to reference using the Harvard Referencing style.
6. References should be from credible sources (Note: Wikipedia and Investopedia are not acceptable).

Introduction
The payback method is a capital budgeting process where the period taken to recover the initial
amount is calculated. The discounted payback method differs from the payback method as it
utilizes discounted cash flow system in its calculations.
The discounted payback system has limited relationship with wealth maximization concepts. Net
Present Value estimates all the future cash inflows and outflows as it also discounted to the
present value. Positive NPV adds real economic value to the cash flows in a company. NPV is
one of the most reliable capital budgeting techniques presently (Hermanson, Edwards &
Invacevich, 2011).

Beaver Tales Pty Ltd Beaver Tales Pty Ltd
       
Capital Budgeting Capital Budgeting

Discount rate 15.00000% Discount rate 15.00000%
Year Cash flow Year Expenses
0 -15,609,792 0 0
1 4,470,000 1 7,143,000
2 4,498,000 2 2,267,726
3 4,529,650 3 2,267,726
4 4,565,413 4 2,267,726
5 4,605,807 5 2,267,726
6 4,651,415 6 2,261,264
7 4,702,891 7 2,261,264
8 4,760,966 8 2,261,264

NPV and Discounted Payback Period 3

9 4,826,464 9 2,261,264
10 4,900,302 10 2,261,264
PV for future Earnings $23,085,154.42 PV for future Expenses $15,609,791.75
NPV $7,475,362.67    
The above calculations indicate that the NPV is positive and the project would be profitable and
viable. All positive NPVs represent projects that are viable but projects with negative NPVs
should not be undertaken.

Discounted payback system

PV for Exp 33217430.05
6,211,304.35
27,006,125.70
1,714,726.62
25,291,399.08
1,491,066.63
23,800,332.45
1,296,579.68
22,503,752.77
1,127,460.59
21,376,292.18
977,607.01
20,398,685.17
850,093.06
19,548,592.11
739,211.35
18,809,380.76
642,792.48
18,166,588.28
558,949.98

17,607,638.30

The total expenses for the Beaver Tale Pty ltd amounted to 33,217,430 while the total earnings
for the project for the next ten years would amount to 46,510,906.25. The figures when discounted
at 15% for ten years periodically would amount to 17,607,638.30 as the negative balance under
discounted payback period.
The discounted payback suggests that the project is unviable.

NPV and Discounted Payback Period 4

Reference

Hermanson, R.H., Edwards, J.D., & Invacevich, S.D. (2011) Accounting Principles: A Business
Perspective. First Global Text Edition, Volume 2 Managerial Accounting, 37-73.