# 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.