WHY IS THE CONCEPT OF PRESENT VALUE SO IMPORTANT FOR CORPORATE FINANCE? The importance of concept of present value to the world of corporate finance is that present value calculations are widely used in business and economics to provide a means to compare cash flows at different times. Present Value’s definition and simplistic formula used for normal purchases, the concept’s importance to corporate finance and why present value is the very first topic taught in finance classes explain that present value is an essential knowledgeable tool to ensure we make the best decisions with our money. However, first, What Does Present Value  PV Mean? Present value is “the current worth of a future sum of money or stream of cash flows given a specified rate of return. Future cash flows are discounted at the discount rate, and the higher the discount rate, the lower the present value of the future cash flows. Determining the appropriate discount rate is the key to properly valuing future cash flows, whether they are earnings or obligations.” Through the definition itself, an importance to corporate finance is explained as well as why professors begin a finance course with a basis explanation in the time value of money – discounting and investment risk included. In more detail, capital investment decisions are longterm corporate finance decisions relating to fixed assets and capital structure. Decisions are made with several criteria to consider, and where corporate management seeks to maximize value in the firm by the correctly calculated net present value when valued using an appropriate discount rate. It would be beneficial on a personal level for the following reasons; “Learning how to use a financial calculator to make present value calculations can help you decide whether you should accept a cash rebate, 0% financing on the purchase of a car or to pay points on a mortgage.” Present value could often the first topic taught in any finance class, due to the fact that knowledge of this formula can be used for basic financial planning that will lead to larger level strategy – making the best company investment decisions. Now, on to the fun stuff that is so anxiously taught in class – the problems and formulas.
2a. $500 if invested for five years at a 4% interest rate:
End of Year1234567
Principal$9,100.00$9,373.00$9,654.19$9,943.82$10,242.13$10,549.39$10,865.88 Interest$273.00$281.19$289.63$298.31$307.26$316.48$325.98 Total$9,373.00$9,654.19$9,943.82$10,242.13$10,549.39$10,865.88$11,191.85
2d. $1000 if invested for ten years at a 0.5% interest rate:
...Ryan Nguyen
04/13/2013
Dr. Choi
Finance 3300
Exam 3 Short Essay.
Net Presentvalue is the difference between an investment’s market value and its cost. For an example, you invest 100 dollars (Cost) into a lemonade stand but you receive 50 dollars (Market Value) of cash inflow. Another would be you buy a house for 50,000(Cost) But you sell it for 75,000(Market Value). Your net presentvalue An Investment should be accepted if the net presentvalue is positive and it should be rejected if the net presentvalue is negative. Net presentvalue uses the discounted cash flow of valuation, which is the process of valuing an investment by discounting future cash flows. Comparison to another rule, which is called the Internal rate of return, uses the discount rate that makes the NPV of an Investment zero. IRR finds the single rate that summaries the rate of return of a project. We only depend on cash flow of a particular investment not the rates offered elsewhere. For an example, you let your brother burrow 100 dollars but he pays you back 125 dollars. You would ask what is the return on this investment, which is 25% or 1.25 dollars back for every 1 dollar invested. This investment would be only valid if the required return is less than 25% because anything more would fall in negative...
...
Net presentValue, Mergers and acquisitions
Abstract
Main objective of undertaking this to report was learn about NPV presentvalue (NPV) method to make capital budgeting decision(Google NEW Project) and success factors involved in mergers and acquisitions(GoogleGroupon Case).
Answers to the Assignments
Part I: Google should go ahead with the new project.
PartII: Google’s acquisition of Groupon would have been win win situation for both corporations
Now I will discuss both parts in detail below.
Part I: Capital Budgeting
Capital budgeting is the process of making longterm planning decision relating to planning for capital assets as to whether or not money should be invested in the long term projects (en.wikipedia.com). Decisions like obtaining new facilities or purchase or new machinery to expand their business. It involves a financial analysis of the various alternative proposals regarding a capital expenditure and to select the best out of the several alternatives.
There are several methods of evaluating investment projects like NPV, IRR, Payback period and Profitability Index (www.investopedia.com). I will be discussing NPV and IRR for this assignment.
Net PresentValue (NPV)
NPV is a method which uses discounted cash flow techniques. Net PresentValue is equal to the difference between the Present...
...Net presentvalue
In finance, the net presentvalue (NPV) or net present worth (NPW) of a time series of cash flows, both incoming and outgoing, is defined as the sum of the presentvalues (PVs) of the individual cash flows. In case when all future cash flows are incoming (such as coupons and principal of a bond) and the only outflow of cash is the purchase price, the NPV is simply the PV of future cash flows minus the purchase price (which is its own PV). NPV is a central tool in discounted cash flow (DCF) analysis, and is a standard method for using the time value of money to appraise longterm projects. Used for capital budgeting, and widely throughout economics, finance, and accounting, it measures the excess or shortfall of cash flows, in presentvalue terms, once financing charges are met.
The NPV of a sequence of cash flows takes as input the cash flows and a discount rate or discount curve and outputting a price; the converse process in DCF analysis, taking as input a sequence of cash flows and a price and inferring as output a discount rate (the discount rate which would yield the given price as NPV) is called the yield, and is more widely used in bond trading.
Formula
Each cash inflow/outflow is discounted back to its presentvalue (PV). Then they are summed. Therefore NPV is the sum of all...
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FINC5001 Capital Market and Corporate Finance

Workshop 5 – Capital Budgeting II
1. Basic Concepts Review
a) In applying Net PresentValue, what factors do we include, and what factors do we ignore?
Use cash flows not accounting income
Ignore
* sunk costs
* financing costs
Include
* opportunity costs
* side effects
* working capital
* taxation
* inflation
2. Practice Questions
a) After spending $3 million on research, Better Mousetraps has developed a new trap. The project requires an initial investment in plant and equipment of $6 million. This investment will be depreciated straightline over five years to a value of zero, but, when the project comes to an end in five years, the equipment can in fact be sold for $500,000. The firm believes that working capital at each date must be maintained at 10% of next year's forecasted sales. Production costs are estimated at $1.50 per trap and the traps will be sold for $4 each. (There are no marketing expenses.) Sales forecasts are given in the following table. The firm pays tax at 35% and the required return on the project is 12%. What is the NPV?

Figures in 000's  
Year  0  1  2  3  4  5 
Unit Sales   500  600  1,000  1,000  600 
Revenues   2,000  2,400  4,000  4,000  2,400 ...
...Presentvalue is where the value on a set date of a future payment is discounted to reflect the time value of money and other factors. This can also apply to a series of future payments. Presentvalue calculations are commonly utilized in business and economics to provide a way to compare cash flows at different times. Presentvalue can be described as the current worth of a future sum of money or stream of cash flows given a specified rate of return. (http://www.getobjects.com) Future cash flows are discounted at the discount rate. The higher the discounted rate, the lower the presentvalue of the future cash flows. Determining what the appropriate discount rate is, is important to correctly place value future cash flows.
The PresentValue of an Ordinary Annuity is the value of a stream of promised or expected future payments that have been discounted to a single equivalent value today. It is extremely useful for comparing two separate cash flows that differ in some way.
PresentValue of an Ordinary Annuity can also be looked at as the amount you have to invest today at a specific interest rate so that when you withdraw an equal amount each period, the original principal and all accumulated interest will be completely used at the end...
...Part I
A. PresentValue with Discount rate of 7% = 15000/(1+7%) = 15000/1.07 = $14,018.69
PresentValue with Discount rate of 4% = 15000/(1+4%) = 15000/1.04 = $14,423.08
B. Account A  PresentValue with Discount rate of 6% = 6500/(1+6%) = 6500/1.06 = $6,132.08
Account B  PresentValue with Discount rate of 6% = 12600/(1+6%)^2 = 12600/1.1236 = $11,213.96
C.PresentValue of Gold Mine 7% = 4900000/1.07 + 61,000,000/(1.07)^2 + 85,000,000/(1.07)^3
= 45,794,392.52 + 61,000,000/1.1449 + 85,000,000/1.2250
= 45,794,392.52 + 53,279,762.42 + 69,385,319.54
= $168,459,474.48
By using the same concept above we can determine the presentvalue of Gold Mine.
PresentValue of Gold Mine @ 5% = 175,421,660.73
PresentValue of Gold Mine @ 3% = 182,858,207.04
When the discount rate is 7%, the presentvalue of gold mine is $168.46m. This value increase by approximately $6.96 when the discount rate is 2% less than 7%. When the discount rate is 3% value of gold mine is 182.86.
Part II
A. Consider the project with the following expected cash flows:
Year  Cash flow 
0  $400,000 
1  $100,000 
2  $120,000 
3  $850,000 
If the discount rate is 0%, what is the...
...1. Basic presentvalue calculations
Calculate the presentvalue of the following cash flows, rounding to the nearest dollar:
a. A single cash inflow of $12,000 in five years, discounted at a 12% rate of return.
b. An annual receipt of $16,000 over the next 12 years, discounted at a 14% rate of return.
c. A single receipt of $15,000 at the end of Year 1 followed by a single receipt of $10,000 at the end of Year 3. The company has a 10% rate of return.
d. An annual receipt of $8,000 for three years followed by a single receipt of $10,000 at the end of Year 4. The company has a 16% rate of return.
2. Cash flow calculations and net presentvalue
On January 2, 20X1, Bruce Greene invested $10,000 in the stock market and purchased 500 shares of Heartland Development, Inc. Heartland paid cash dividends of $2.60 per share in 20X1 and 20X2; the dividend was raised to $3.10 per share in 20X3. On December 31, 20X3, Greene sold his holdings and generated proceeds of $13,000. Greene uses the netpresent value method and desires a 16% return on investments.
a. Prepare a chronological list of the investment's cash flows. Note: Greene is entitled to the 20X3 dividend.
b. Compute the investment's net presentvalue, rounding calculations to the nearest dollar.
c. Given the results of part (b), should Greene have acquired the Heartland...
...debts. A sole
proprietor has unlimited liability. Investors in corporations have limited liability. They can lose their investment, but no more.
Chapter 2
How to calculate Presentvalues
Question 6: Perpetuities
An investment costs $1,548 and pays $138 in perpetuity. If the interest rate is 9%, what is the NPV?
Answer
NPV = −1,548 + 138/.09 = −14.67 (cost today plus the presentvalue of the
perpetuity).
Question 7: Growing perpetuities
A common stock will pay a cash dividend of $4 next year. After that, the dividends are expected to increase indefinitely at 4% per year. If the discount rate is 14%, what is the PV of the stream of dividend payments?
Answer
PV = 4/(.14 − .04) = $40.
Question 19: Presentvalues
As winner of a breakfast cereal competition, you can choose one of the following prizes:
a. $100,000 now
b. $180,000 at the end of five years
c. $11,400 a year forever
d. $19,000 for each of 10 years
e. $6,500 next year and increasing thereafter by 5% a year forever.
If the interest rate is 12%, which is the most valuable prize?
Answer
a. PV = $100,000.
b. PV = $180,000/1.125 = $102,136.83.
c. PV = $11,400/0.12 = $95,000.
d.
e. PV = $6,500/(0.12 0.05) = $92,857.14.
Prize (d) is the most valuable because it has the highest presentvalue.
Question 20: Annuities
Siefried Basset is 65...
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