Question C [1] The Net Present Value [NPV] is the total sum of the present values of all the expected cash flows. For a project with a normal cash flows, this would mean that the NPV is the present value of expected cash flows minus the initial cost of the project. The formula is as such; NPV = -CF0 + CF1 (1+k)-1 + CF2 (1+k)-2 + … + CFn (1+k)-n where; CF0 is the initial investment outlay, or cash outflow CFt is the after-taxed cash inflows at time t k is the required rate of return for the project or investment. Based on the information given; NPV of Project L= -$100 + $10 (1+0.1)-1 + $60 (1+0.1)-2 + $80 (1+0.1)-3 = $18.783 [in thousands of dollars] NPV of Project S= -$100 + $70 (1+0.1)-1 + $50 (1+0.1)-2 + …show more content…
If Project S is accepted; Project S’ cash inflows sum up to a total of $140, 000. It is more than enough to recover the cost outlay [cash outflow or cost of the investment], maintain and deliver the 10% opportunity cost of capital, and still have [present value of] $19.985 [in thousands of dollars] available which belongs to the shareholders [shareholder’s wealth increased by $19.985 (in thousands of dollars)]. If Project L and Project S are independent, both of the projects should then be accepted as they both increase the shareholder’s wealth. If Project L and Project S are mutually exclusive, and, one project is to be chosen; Project S should then be chosen instead of Project L, as Project S increases the shareholder’s wealth more than Project L. Question C [3] Based on the formula given in the answer to Question C [1], the NPV relies on the WACC used. This means that the NPV is affected by the WACC given or used. Consequently, the NPV would change, if the WACC is changed. When the WACC inclines, the NPV declines. Similarly, when the WACC declines, the NPV inclines. Question D [1] The internal rate of return is the rate of return, based on the discounted cash flows that a company can expect to earn by investing in the project. It is the interest rate that makes the NPV of the investment or project, equals to zero [the proposed capital expenditure equal to the present value of the
* If we want to use WACC method, one assumption must be met: this program will not change the debt-equity ratio of AirThread. Under LBO approach, it’s
Free cash flows of the project for next five years can be calculated by adding depreciation values and subtracting changes in working capital from net income. In 2010, there will be a cash outflow of $2.2 million as capital expenditure. In 2011, there will be an additional one time cash outflow of $300,000 as an advertising expense. Using net free cash flow values for next five years and discount rate for discounting, NPV for the project comes out to be $2907, 100. The rate of return at which net present value becomes zero i.e.
b) The decision to invest in projects increases the shareholders value of the company. This is consistent with the growth and from the NPV criteria, positive NPV of projects increases the shareholder's value.
Internal Rate of Return is a discount rate in which the net present value of an investment becomes zero. The investment should be accepted if the IRR is not less than the cost of capital. The IRR measures risk, by showing what the discounted rate would have to reach to lose all present value. Futronics Inc. investment would have an IRR of 14.79%. The investment should be accepted since it is greater than the 8% cost of capital. The 14.79% IRR shows the growth expected from the
32) Compute the NPV for the following project. The initial cost is $5,000. The net cash flows are $1,900 for four years. The net salvage value is $1,000 when the project terminates. The cost of capital is 10%.
The Best Manufacturing Company is considering a new investment. Financial projections for the investment are tabulated here. The corporate tax rate is 38 percent. Assume all sales revenue is received in cash, all operating costs and income taxes are paid in cash, and all cash flows occur at the end of the year. All net working capital is recovered at the end of the project.
Since this project is a going concern, the levered terminal and present values are calculated using the weight average cost of capital (WACC) as the discount rate, which we calculate to be 16.17%.
Account for time. Time is money. We prefer to receive cash sooner rather than later. Use net present value as a technique to summarize the quantitative attractiveness of the project. Quite simply, NPV can be interpreted as the amount by which the market
Net Present Value (NPV) calculates the sum of discounted future cash flows and subtracting that amount with the initial investment of the project. If the NPV of a project results in a positive number, the project should be undertaken. It is the most widely used method of capital budgeting. While discount rate used in NPV is typically the organization’s WACC, higher risk projects would not be factored in into the calculation. In this case, higher discount rate should be used. An example of this is when the project to be undertaken happens to be an international project where the country risk is high. Therefore, NPV is usually used to determine if a project will add value to the company. Another disadvantage of NPV method is that it is fairly complex compared to the other methods discussed earlier.
1. The net present value is the projects present value of inflows minus its cost. It shows us how much the project contributes to the shareholders wealth. The NPV of each franchise are:
As we have mentioned above, the relevant cash flows to calculate the NPV of the project are the incremental cash flows, which mainly include the operating cash flows and the investment cash flows.
Internal rate of return (IRR) is a rate of return on an investment. The IRR of an investment is the interest rate that will give it a net present value of zero.
c. The project's internal rate of return is the rate at which the NPV would be 0%. This is found in Excel. The IRR
The Internal Rate of Return (IRR) is the rate of return that an investor can expect to earn on the investment. Technically, it
Project appraisal techniques are used to evaluate possible investment opportunities and to determine which of these opportunities will generate the best return to the firm’s shareholders. Therefore, it is vital for the firm if they wish to continue receiving funds from shareholders to employ the best techniques available when analysing which investment opportunities will give the best return. There are two types of project appraisal techniques: non-discounted cash flows and discounted cash flows. The Net Present Value and internal rate of return, examples of discounted cash flows, are in use in many large corporations and regarded as more effective than the traditional techniques of payback and accounting rate of return. In this paper, I