2. 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. You must respond to at least two of your classmates’ postings to receive full credit.

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


350,000

4


750,000


430,000


320,000

Can you answer this question today

To determine whether Duncombe Village Golf Course should pursue the investment, we need to calculate the net present value (NPV) of the project. NPV helps to assess the profitability of an investment by taking into account the time value of money and the cost of capital.

To calculate NPV, we first need to determine the cash inflows and outflows for each year, including the initial outlay of $1,200,000. Then, we discount these cash flows to present value terms using the cost of capital, which in this case is 8 percent.

Year 1:
Net Cash Flow = Cash Receipts - Cash Disbursements
= $1,000,000 - $500,000
= $500,000

Year 2:
Net Cash Flow = Cash Receipts - Cash Disbursements
= $925,000 - $475,000
= $450,000

Year 3:
Net Cash Flow = Cash Receipts - Cash Disbursements
= $800,000 - $450,000
= $350,000

Year 4:
Net Cash Flow = Cash Receipts - Cash Disbursements
= $750,000 - $430,000
= $320,000

Now, let's calculate the present value (PV) of each year's net cash flow.

Year 1:
PV = Net Cash Flow / (1 + Cost of Capital) ^ Year
= $500,000 / (1 + 0.08) ^ 1
= $462,962.96

Year 2:
PV = Net Cash Flow / (1 + Cost of Capital) ^ Year
= $450,000 / (1 + 0.08) ^ 2
= $396,694.21

Year 3:
PV = Net Cash Flow / (1 + Cost of Capital) ^ Year
= $350,000 / (1 + 0.08) ^ 3
= $289,449.67

Year 4:
PV = Net Cash Flow / (1 + Cost of Capital) ^ Year
= $320,000 / (1 + 0.08) ^ 4
= $241,642.47

Now, calculate the NPV by summing up all the present values and subtracting the initial outlay:

NPV = PV1 + PV2 + PV3 + PV4 - Initial Outlay
= $462,962.96 + $396,694.21 + $289,449.67 + $241,642.47 - $1,200,000
= -$209,250.69

The negative NPV suggests that the investment would result in a loss when considering the cost of capital of 8 percent. Therefore, Duncombe Village Golf Course should not pursue the investment.

It's important to note that considering only the NPV may not provide a complete picture of the investment. Other factors such as the strategic value of the investment, the potential for future growth, and the company's overall financial situation should also be considered before making a final decision.