Accounting & Financial Management

DL Tourers Ltd is a leading brand in the UK in manufacturing and selling of a wide range of touring caravans. For lowering the environmental impact, a caravan, the company is focused on developing and introducing a new caravan with a smaller engine or battery power that is called Ecovan. In the proposed project, the company has considered the 11% WACC and expected to generate the minimum average annual return of 25%. Therefore, the financial viability of the Ecovan project is evaluated by using two approaches of investment appraisal that are Present Net Value and Average Rate of Return.

Net Present Value is a great tool to check the financial viability of an investment proposal because it determines the present value of expected returns concerning individual discount rate (McCartney, Pierce and Mackie, 2016). In the project of Ecovan, the company has considered 11% WACC so as the following calculation of NPV is carried out concerning an 11% discount rate:

As per the above calculation of the Net Present Value of the Ecovan Project, the value of NPV is positive, that indicates that the selected project will attain the expectation of the Board of DL Tourers Ltd. This is because it will offer a positive return at 11% WACC.

It determines the average rate of net earnings or cash flow concerning the total value of an initial investment in the whole expected lifecycle (Su and et al., 2018). Therefore, the following calculations are presenting the ARR of the project of Ecovan Project:

The above table is showing that the proposed project will offer the ARR of 55.44% (Annually) in its whole life cycle. It will attain the expectation of the company' s board.

As per the case, DL Tourers Ltd. has considered WACC of 11% to check the financial viability of the new project of Ecovan. In this regard, the calculation of NPV and ARR has disclosed the respectively positive NPV of £1012240 and the ARR of 55.44%. Therefore, the investment in Ecovan will attain organisation's target of 25% of an annual average rate of return so as the board of DL Tourers Ltd. should consider the investment option of Ecovan to enhance overall business profitability and growth.

Reference

• McCartney, M. W., Pierce, E. M., and Mackie, W. (2016). The Bus Decision: A Case Study Employing Capital Budgeting And Creative Thinking. Journal of Business Case Studies (Online), 12(4), 169.
• Su, S. H. and et.al., (2018). Application and effects of capital budgeting among the manufacturing companies in Vietnam. International Journal of Organizational Innovation (Online), 10(4), 111-120.