Notes On The Net Present Value - 1462 Words

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