Net Present Value and Art Gallery Essay

Submitted By zakabdullah
Words: 3136
Pages: 13

Executive Summary
This report provides an assessment and evaluation of two capital projects according to estimates of their future profits and their future cash inflows. The two projects are: Art Gallery project at an estimated cost of £1,700,000 and Swimming Pool and Leisure centre project at an estimated cost of £2,000,000. The Methods used to assess both projects are the Account Rate of Return method, the Payback period method and the Net Present Value method. The calculations of these methods are based on the information provided in appendix on. The methods of assessments show that the Art Gallery project would outperform financially the Swimming Pool and Leisure Centre project. This report is also explaining a given break-even analysis case using the information provided in appendix 2. It is also explaining the limitations, disadvantages and advantages of break-even analysis.
The report finds that the prospects of investing in the Art Gallery project would be more positive than that of the Swimming Pool and Leisure centre project and this is due to the following factors:
The accounting rate of return expected from the Art gallery is higher than that of the swimming pool and leisure centre
The period of risk for the art gallery is less than that of the swimming pool
The NPV for the art gallery is higher than that of swimming.
The report also investigates the fact that the assessments conducted have limitations. Some of the limitations include:
The methods of assessment are based on estimates of future profits and future cash inflows; therefore the assessments will only be as good as the accuracy of the estimates of these items.
Some methods do not take into account the time value and the duration of project.
Some methods ignore the life expectancy of the project and the cash inflows received.

A Formal Report
From: The Financial Manager of Muddlethrew County Council (student)
To: The CEO of Muddlethrew County Council (Miss Irene Vera. Aproblem)
Date: 18/05/2012
Introduction
Dear CEO, I have been presented with information regarding two proposed projects: Art Gallery project and Swimming and Leisure Centre project. I have been informed that the budget allocation does not enable to sanction both projects; therefore, you want me to justify and choose one project. In order for me to make a clear justification for one of the projects, I will use some capital investment methods. The capital investment methods that I will use in this report are: Accounting Rate of Return method, Payback Period method and Net Present Value method. I will calculate and explain these techniques clearly using the information provided in appendix 1 and I will examine the relative strengthens and weaknesses of each of these methods. Subsequently, I will use these methods to assess each project and hence justify and propose one of the projects. However, this only one aspect of the decision and you should consider other factors such as pollution, inflation and the number of competitors. Above all, my assessment of both projects will be based on the estimates of future profits and future cash inflows that I have been provided with. Therefore my assessment will only be as good as the accuracy of the estimates of these items.

In this report, I will also explain the concept of break even, its limitations and the advantages and disadvantages of it. Finally, I will explain a given break-even analysis case using the filling station details provided in appendix 2; I will prepare a table and draw a graph to show the break-even point for the filling station.

Appendix one:

The Council has two proposals to consider, building an new art gallery at an estimated cost of £1,700,000 or providing a new swimming pool and leisure centre at an estimated cost of £2,000,000
The account and project managers have provided the following estimates of net cash flows for the five years…