Question

‘Lost Dogs’ is trying to determine whether they should build kennels to provide boarding services to customers to cross subsidise their dog rescue service. They have performed the calculations and found the following: Method Result Accounting Rate of Return 3.89% Payback Period 5-6 years Net Present Value $36,987 positive Required (250 words): c. Draw an overall conclusion as to whether, based on the 3 methods, you would recommend the project.

Answer 1

The project has a positive Net Present Value (NPV) of $36,987. A project with a positive NPV is acceptable. A positive Net Present Value denotes that the present value of inflows from the project is greater than its outflows. NPV is seen as the method of screening of a capital project as it provides return in absolute amount. The project is having a payback period of 5 to 6 years. The project is able to payback its investment within the lifespan of that particular project. Since the NPV is positive, the discounted payback period would also be within the life of the project. If the payback period of this project is within the time period desired by the organization, the project can be accepted. The accounting rate of return or the Average rate of return is a return obtained from the project based on its accounting profits. It is the return obtained in relation to the investment made. The Accounting Rate of Return or ARR of the project is 3.89%. The decision as to accept or reject the proposal based on ARR should be made by analyzing the minimum rate of return or the required rate of return expected from the project. If the ARR is greater than the minimum expected rate, the project could be accepted. If the ARR is lower than the minimum rate, project could be rejected. NPV is viewed as the best capital budgeting method since it incorporates time value of money and provides returns in absolute figures. Based on NPV, the project to build kennels to provide boarding services to dog rescue services to its customers is profitable and can be accepted.