Scottie O’Donnell
Hot New Café: Capital Budget
Given the foregoing data, Hot New Café will generate a net cash flow or $188,600 per year or $943,000 for a period of five years. As compared to the cost of initial investment required, the proposed project will give positive revenue to the company in span of five-years.
Given the annual cash inflow of the proposed plan, Hot New Café’s payback period is projected to be 4.51 years. This means that given the annual net cash flow, the company will be able to redeem the initial investment in less than five years.
Using the net present value method, the proposed project will give the company a negative value of $135,057.62. This means that the project will not give the entity an additional income in the next five years.
The payback period and net present value method presented two contrasting results. One shows that the company will be able to redeem its initial investment in less than five years, while the other manifests a negative income value from the project. If the payback method alone will be used, the proposed plan is feasible, however, its negative NPV revealed otherwise. So, the project is should not be pursued.
Consequently, Hot New Café has a policy to reject the project that goes beyond three years payback period. As the plan to build additional building has a PBP of 4.51 years, the management should reject the proposal immediately.Scottie O’Donnell
