Program for University Canada West: Managerial Accounting

The purpose of this proposal was to evaluate the attractiveness of investment in a new Program for UCW using NPV, IRR, and Payback period. The project under consideration costs $7,000,000, has a 5 (five) years life, and has no salvage value. Depreciation is straight-line to zero. The required return is 17%. Sales are projected at 1,500 students/year. Tuition Fees per student will be $5,500. Variable cost per student will be $2,500, and fixed costs are $1,500,000 per year. Taxes rate is 30%.

Based on the data provided above, a base projection was created for the project. NPV and IRR calculations for base projections are provided in Table 1 below.

Table 1. Base NPV and IRR

Base-case Scenario
	Year 0	Year 1	Year 2	Year 3	Year 4	Year 5
Initial Investment	-$7,000,000
Sales		$8,250,000	$8,250,000	$8,250,000	$8,250,000	$8,250,000
Fixed Cost		-$1,500,000	-$1,500,000	-$1,500,000	-$1,500,000	-$1,500,000
Variable Cost		-$3,750,000	-$3,750,000	-$3,750,000	-$3,750,000	-$3,750,000
Depreciation		-$1,400,000	-$1,400,000	-$1,400,000	-$1,400,000	-$1,400,000
Tax		-$480,000	-$480,000	-$480,000	-$480,000	-$480,000
Net Cashflow	-$7,000,000	$2,520,000	$2,520,000	$2,520,000	$2,520,000	$2,520,000
Discounted Cashflow	-$7,000,000	$2,153,846	$1,840,894	$1,573,414	$1,344,798	$1,149,400
NPV	$1,062,352
IRR	23%

According to the calculations provided above, the project should be accepted as the NPV is positive and the IRR is above the required rate of return of 17% ( Tayler & Warren, 2018). However, while the base-case scenario is attractive, the best-case and worst-case scenarios should be considered before making the final decision. The calculations for these scenarios are provided in Tables 2 and 3 below. These calculations were conducted assuming a ±15% variation in sales.

Table 2. Best-case Scenario NPV and IRR

Best-case Scenario
	Year 0	Year 1	Year 2	Year 3	Year 4	Year 5
Initial Investment	-$7,000,000
Sales		$9,487,500	$9,487,500	$9,487,500	$9,487,500	$9,487,500
Fixed Cost		-$1,500,000	-$1,500,000	-$1,500,000	-$1,500,000	-$1,500,000
Variable Cost		-$4,312,500	-$4,312,500	-$4,312,500	-$4,312,500	-$4,312,500
Depreciation		-$1,400,000	-$1,400,000	-$1,400,000	-$1,400,000	-$1,400,000
Tax		-$682,500	-$682,500	-$682,500	-$682,500	-$682,500
Net Cashflow	-$7,000,000	$2,992,500	$2,992,500	$2,992,500	$2,992,500	$2,992,500
Discounted Cashflow	-$7,000,000	$2,557,692	$2,186,062	$1,868,429	$1,596,948	$1,364,913
NPV	$2,574,043
IRR	32%

Table 3. Worst-case Scenario NPV and IRR

Worst-case Scenario
	Year 0	Year 1	Year 2	Year 3	Year 4	Year 5
Initial Investment	-$7,000,000
Sales		$7,012,500	$7,012,500	$7,012,500	$7,012,500	$7,012,500
Fixed Cost		-$1,500,000	-$1,500,000	-$1,500,000	-$1,500,000	-$1,500,000
Variable Cost		-$3,187,500	-$3,187,500	-$3,187,500	-$3,187,500	-$3,187,500
Depreciation		-$1,400,000	-$1,400,000	-$1,400,000	-$1,400,000	-$1,400,000
Tax		-$277,500	-$277,500	-$277,500	-$277,500	-$277,500
Net Cashflow	-$7,000,000	$2,047,500	$2,047,500	$2,047,500	$2,047,500	$2,047,500
Discounted Cashflow	-$7,000,000	$1,750,000	$1,495,726	$1,278,399	$1,092,648	$933,888
NPV	-$449,339
IRR	14%

The analysis demonstrates that the project cannot be accepted based on the worst-case scenario. Therefore, it is crucial to make in-depth sales projections and estimate the probability of worst-case scenario to occur before making the final decision.

In order to help UCW with decision-making, payback period for the project was calculated using base projections. The results demonstrated that the payback period for the project was 2.78 years, which is a relatively fast return of capital. Thus, if UCW invests in projects that take three or more years to pay for themselves, the new Project should be accepted.

Reference

Tayler, W. B., & Warren, C. S. (2018). Managerial Accounting. Cengage Learning.

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