Net Present Value Profitability Accounting Essay


B ) Net Present Value

What is Net present value ? Net present value is difference between the present value ( pv ) of the future cash flows from an investment and the amount of investment. Present value of the expected cash flow is computed by discounting them at the required rate of return. This technique ,like internal rate of return which follows, brings together the concept of discounting and the weighted average cost of funds. The former is required to adjust for the time value of money while the letter provides an interest rate or discount rate to apply to the future cash flows. Consider the project which we have already evaluated using payback and accounting rate of return. Besides that npv recognises that £1 today is worth more than £1 tomorrow. For simply example, an investment of £1000 today at 10 percen will yield £1100 at the end of the year; therefore, the present value of £1100 at the desired rate of return ( 10 percen )is £1000. The amount of investment ( £1000 in this example ) is deducted from this figure to arriveat npv which here is zero ( £1000 - £1000 ). A zero npv mean the project repays original investment plus the required rate of return. A positive means a better return, and a negative npv means a worse return, than the return from zero npv. It is one of the two discounted cash flow ( DCF ) technique ( the other is internal rate of return ) used in comparative appraisal of investment proposals where the flow of income varies over time. On the other hands, the projects in conditions where all worthwhile project can be accepted it maximises shareholder utility. Projects with positive npvs should be accepted since they increase shareholder wealth, while those with negative npvs decrease shareholder wealth.

There are many advantages if a firm use the NPV method in a investment. For example, with used this method its can tells whether the investment will increase the firm's value. Besides that, the firm able to considers the time value of money, considers all the cash flows, and Considers the risk of future cash flows (through the cost of capital). Furthermore NPV is essential for financial appraisal of long-term projects, it measures the excess or shortfall of cash flows, In the NPV model it is assumed to be reinvested at the discount rate used. This is appropriate in the absence of capital rationing. NPV method also indicates whether a proposed project will yield the investor's required rate of return and consider both magnitude and timing of cash flows. Another advantages used this method were the firm will be able to consistent with shareholder wealth maximization ( added net present values ) its will generated by investments are represented in higher stock prices.

A ) Profitability

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Profitability is the primary or main goal of all business ventures weather produce a good or services. Without profitability the business will not survive in the long run. So measuring current and past profitability and projecting future profitability is very important to know how long firma or business can survive and its generate profit or loss.

We can define profitability as measuring that find out the difference between income and expenses. Income is money generated the activities of business while expenses is cash outflows that used to produce the product or expenses which relating the business such as administration, salary staff, heating and lighting cost, shipping and so on. In other meaning of words expenses are the cost of resources used up or consumed by the activities of the business. For example, The management committee of King`s College is considering a proposal by the catering manager, Mr. Steven Cook to close out- dated dining hall and to replace it with new self service canteen. It is show that the resources such as a equipments or furniture whose useful life is more than one year is used up over a period of years, thus its take long time to determine the real profit or loss on the equipments and furniture are used. However, the committee or Governor of proposal can evaluate the proposal with determine time of period six months or a year to look it will comes benefit or loss on the business. From this example, we can look the cash inflows and cash outflows to running this proposal. There are many cash inflows such as sales of goods £ 164 000 per year, disposal asset (equipments and furniture ), and sold of assets. Besides that, there are many cash outflows which can see from the proposal such as salary ( staffs and manager ), Variable cost, fixed cost, depreciation, and others.

Thus, the manager of proposal will estimate profitability through time of period following by the year. Via time of period that was prescribed its will show the profit or loss every year.To know that this proposal will be implement or not, its able to detect via estimate this method. If this method show that the value NPV is positive or the value more than or equal zero will can accept this proposal. But, while the value of NPV is negative or less than zero the Governor should be reject this project.

In conclusion, the manager or Governor have a choice between accept or reject this proposal. If this project should be to implement for facility students and staffs. It have to evaluate again to avoid from loss or negative impact for students, staffs, committee of college and business.

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Briefly discuss any non-financial factors which you consider should be borne in mind by the Governors in this case ?

The management committee of King`s college of Further Education was considering a proposal by the catering manager, Mr. Steven Cook ,to close the existing out-dated dining hall that has been used since the college was opened in the late 1960s and to replace it with a new self service canteen offering a wide variety of good quality meals. To discuss any non-financial factor which can to consider this project, there are some factor that will be discuss.

  1. Do the survey to student or customers .

    In some cases, non-financial factor may be essential requirements in consider a proposal to implement . In this case the Governors should be do some survey on their students or customer to know what is the best way in order to meet need and customer needs. Therefore , the manager can do the best planning to implement this proposal that will be give the good impact on successful this project because the manager try to understand or study the market .

  2. Improving staff morale, making it easier to recruit and retain employees.

    Besides that , with do the seminar or motivation by the management committee of King`s College. It can improve staff morale, skills , capability , competencies ,making easier to recruit and retain the employees . With follow this ways the governor can reduce or no need to take the part time staff to running their business. Furthermore, the manager can reduce the cost to implement this proposal .

  3. Study more detail on the proposal or project.

    Before implement the proposal the manager or staff should be sit down and do the meeting dragged on to think the best way to achieve the main objectives or aims successfully. The Governor could be give the suggestions that can give the benefits not only the company but also to student. For example, the committee can do the best way to teach their student to take care about cleanliness.

  4. Location

    In this part, location is one of main factor that need to study more detail by the manager. If the Governor or manager of proposal chose the wrong location, it can be negative impact on college and students. Unsuitable and uncomfortable location will be not contribute anything to college and students and the worse thing is it make loss to the company.

  5. External factor

    External factor also one of the non-financial factors which determine the successful the proposal or project. Without to determine the right external factor, its will be arise competition with the another competitor. Thus the Governor must think the best things to avoid the external factors.


Dr. Mohd Amy Azhar Mohd Harif, Ph.D, C.A.(Mt) ( 2007 ) financial and non-fanancial factors that contribute to the franchisee. June page 6-9.

Glen Arnold (2007) Essentials of Corporate Financial Management, Chapter 2-3 page 35- 117