University Graduation Project: NPV and IRR Feasibility Analysis

Project Title, Description, and Scope

When an organization is established, a number of associated elements ultimately become a regular part of its operations. Things are changing very rapidly in the current corporate world, which not only alters the entire environment of the organization but also shifts its customer base. Inevitably, organizations use different strategies to grow their bottom line and expand their customer base. Sometimes organizations face significant problems over the long run, but there are strategies that entities can adopt to address such challenges comprehensively.

To adapt to change, organizations must undertake projects that have a direct bearing on the company's overall financial position. The main focus of this paper is a graduation plan for a university accommodating 800 students, including a luncheon facility. Different project management tools — specifically NPV and IRR — have been used to assess the feasibility of the project. The project title is Graduation Project, and a planned approach has been adopted to present the work in a clear and understandable manner.

Broadly speaking, a project is an assignment or consignment upon which an organization's activities are based (Bossaerts & Degaard, 2006). Organizations analyze and undertake projects at regular intervals because doing so has a positive relationship with the company's bottom line (Bossaerts & Degaard, 2006). The scope of this project is quite broad from the university's standpoint, as it aims to admit 800 students and offer luncheon facilities — an added advantage over competitors.

The project objectives are as follows:

Project Objectives and Planning

• To gain 800 new graduation admissions.
• To achieve a competitive advantage through effective strategies.

Specifications: The budget for the project has been fixed at £58,000. Ninety-three staff members (administrative, accounts, and production) will be affected by this update.

Project planning is a broad term that encompasses planning, organizing, and controlling.

Planning: In order to attract a high number of admissions, the university must equip its computer lab and library professionally. The project manager must first calculate the approximate salvage value of existing assets — that is, how much the institution would recover if those assets were sold on the open market. In addition, the hiring of staff and managers requires significant upfront expenditure.

NPV Analysis and Milestone

Organizing: Organizing is the most important element of project management. The project manager has decided to assign all departmental work — including hiring relevant staff and embedding upgraded software — to a designated assistant.

Controlling: Beyond increasing surplus, the organization also emphasizes cost control as a key operational priority.

Net Present Value (NPV) analysis is widely regarded as one of the most sophisticated approaches to evaluating an investment (Erich & Helfert, 2001). Its main advantage is its use of the concept of the Time Value of Money (TVM) (Denzil & Anthony, 2009). TVM is a foundational principle in finance — the idea that money available today is worth more than the same amount in the future (Erich & Helfert, 2001). The computed NPV table for the project is presented below.

The project manager has allocated an initial cash outlay of £58,000. The projected cash inflows and their discounted values at a 10% discount rate are as follows:

Year 1: Undiscounted £2,000 → Discounted £1,818
Year 2: Undiscounted £5,000 → Discounted £4,132
Year 3: Undiscounted £8,000 → Discounted £6,011
Year 4: Undiscounted £16,000 → Discounted £10,928
Year 5: Undiscounted £25,000 → Discounted £15,523
Year 6: Undiscounted £27,000 → Discounted £15,241
Year 7: Undiscounted £28,000 → Discounted £14,368
Year 8: Undiscounted £30,500 → Discounted £14,228
Sum of Discounted Cash Flows: £82,250
Less: Initial Outlay: £58,000
Net Present Value: £24,250

IRR Analysis

From the table above, it is clear that undertaking the Graduation Project will generate economic benefits for the organization over the long run. The break-even point will be reached at approximately 6.44 years. Because the NPV is positive, the project manager is justified in recommending that this project be funded. The revenue figures increase strongly over the first five years but taper off slightly in Years 6, 7, and 8. A positive NPV is a clear indicator of the project's viability, and the institution should pursue it for long-term productivity. Management should also strive to accelerate earnings growth in the later years and aim to reduce the break-even period to approximately four years.

The Internal Rate of Return (IRR) is the discount rate at which the NPV of a project equals zero — in other words, the point at which total initial expenditure and cumulative revenue net out to zero (Erich & Helfert, 2001). The IRR computation for this project is as follows:

Year 0: –£60,000
Year 1: £2,000
Year 2: £5,000
Year 3: £8,000
Year 4: £16,000
Year 5: £25,000
Year 6: £27,000
Year 7: £28,000
Year 8: £30,500
IRR: 17%

Conclusion

Forming an organization is not a difficult task, but maintaining its position is genuinely challenging, and many fail to do so effectively. An organization is essentially a place where people of different mindsets and backgrounds work together to accomplish a specific goal.