Even though the cost of initial investment might be higher, it could be discounted over the years to ascertain the net present value of the pencil business project.  The class should finance the idea since it would generate additional revenue to the school. Moreover, the students would be able to obtain the products at lower cost. The technology employed in the production process would be environmentally friendly, because fewer toxic wastes were emitted in the atmosphere. In addition, some of the materials used in the production process could be recycled to produce more items, thus increasing the number of units produced. The pencil brand would also attract more customers.

It is beneficial to invest in the pencil business, and this is evident from the following illustration. Suppose the initial costs for the pencil investment is $25,000 and the following are the expected cash inflows: $5,000 for year 2, $10,000 for year 3, $15,000 for year 4, and $12,000 for year 5. All these cash flows come at the beginning of the period and have a discount rate of 10%. The following calculations are used when making investment decision on the pencil business.

Net Present Value (NPV) Calculation of the Pencil Business Pitch

NPV= ${[5,000/(1+0.1)^2] + [10,000/(1+0.10)^3] + [15,000/(1+0.10)^4] + [12,000/(1+0.10)^5]} – 25,000

NPV =$ (4,132 + 7,513 + 10,245 + 7,451) -25,000

NPV = $29,341 -25,000

NPV = $4,341

Internal Rate of Return (IRR) of the Pencil Business Calculation

IRR is calculated by equating the Net Present Value (NPV) to zero.

NPV = 0

-25 + {[5,000/(1+IRR)^2] + [10,000/(1+IRR)^3] + [15,000/(1+IRR)^4] + [12,000/(1+IRR)^5]}= 0

Therefore, IRR = 14.87%

In conclusion, the class should invest in the pencil production, because it is profitable. The reason for this is that the net present value and the internal rate of return for the business are positive.

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