The Management of International Tourism (RLE Tourism) by Witt Stephen F.;Brooke Michael Z.;Buckley Peter J.;

Author:Witt, Stephen F.;Brooke, Michael Z.;Buckley, Peter J.;
Language: eng
Format: epub
Publisher: Taylor & Francis Group

where

NPV =

the net present value of the project

=

summation over years, 1,2, …, n

Xt =

the forecast net cash flow arising at the end of year t, that is, the difference between operational cash receipts and operational cash expenditures (including additional investment)

k =

the required rate of return (or discount rate)

n =

the life of the project in years

I =

the initial cost of the investment

Thus, the net present value of a project is obtained by summing the forecast net cash flows over the project's life, discounted at a rate which reflects the cost of a loan of equivalent risk on the capital market, and deducting the initial investment outlay. Hence, an investment is profitable if its NPV is positive, so all projects that offer a positive net present value when discounted at the required rate of return for the investment should be accepted in order to maximize wealth.

For example, suppose that a particular tourism project requires an initial investment of $1,000 and that the forecast net cash inflows are $620 receivable after one year and $580 receivable after two years. The firm divides its various projects into three categories: class A where the risk is below average and the required rate of return is 10 per cent; class B where the risk is average for the particular sector of the tourism industry and the required rate of return is 13 per cent; class C where the risk is above average and the required rate of return is 16 per cent. The project may be evaluated from the NPV viewpoint by substituting into equation (6.1) as follows:

If the project falls in class A

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