npv
Janice Miller
American Intercontinental University
Managerial Accounting 310
Instructor: Matt Keogh
Introduction
“Net Present Value (NPV) is the present value of the net cash inflows generated by a project including salvage value, if any, less the initial investment on the project,” (Irfanullah, Jan., 2013). It is preferred as one of the most reliable measures employed in capital budgeting since it accounts for the time value of money as it uses the discounted cash inflows. The net cash inflow is equivalent to the total cash inflow during a given period less the expenses incurred directly on generating the cash inflow. In assessing capital budgeting with this method, a target rate of return is usually set which is used to discount the net cash inflows from a project. NPV method provides better decisions than other methods when making capital investment. When choosing between competing investments by applying NPV calculation method then: if NPV>0 we accept the investment; if NPV<0 we reject the investment; and when NPV=0 then the investment is marginal (Wilkinson, J., 2015). The formula for calculating NPV is (Finance Formulas, 2015)
Where
When the cash flows are equal then the formula for NPV simplifies to (Finance Formulas, 2015)
Where
This task in this individual project involves applying the net present value, both pre-tax and post-tax to decide on the feasibility of certain project investment.
Methods
Task
Consider the following scenario:
Deer Valley Lodge, a ski resort in the Wasatch Mountains of Utah, has plans to eventually add five new chairlifts. Suppose that one lift costs $2 million, and preparing the slope and installing the lift costs another $1.3 million. The lift will allow 300 additional skiers on the slopes, but there are only 40 days a year when the extra capacity will be needed. (Assume that Deer Valley Lodge will sell all 300 lift tickets on those 40 days.) Running the new lift will cost $500 a day for the entire 200
American Intercontinental University
Managerial Accounting 310
Instructor: Matt Keogh
Introduction
“Net Present Value (NPV) is the present value of the net cash inflows generated by a project including salvage value, if any, less the initial investment on the project,” (Irfanullah, Jan., 2013). It is preferred as one of the most reliable measures employed in capital budgeting since it accounts for the time value of money as it uses the discounted cash inflows. The net cash inflow is equivalent to the total cash inflow during a given period less the expenses incurred directly on generating the cash inflow. In assessing capital budgeting with this method, a target rate of return is usually set which is used to discount the net cash inflows from a project. NPV method provides better decisions than other methods when making capital investment. When choosing between competing investments by applying NPV calculation method then: if NPV>0 we accept the investment; if NPV<0 we reject the investment; and when NPV=0 then the investment is marginal (Wilkinson, J., 2015). The formula for calculating NPV is (Finance Formulas, 2015)
Where
When the cash flows are equal then the formula for NPV simplifies to (Finance Formulas, 2015)
Where
This task in this individual project involves applying the net present value, both pre-tax and post-tax to decide on the feasibility of certain project investment.
Methods
Task
Consider the following scenario:
Deer Valley Lodge, a ski resort in the Wasatch Mountains of Utah, has plans to eventually add five new chairlifts. Suppose that one lift costs $2 million, and preparing the slope and installing the lift costs another $1.3 million. The lift will allow 300 additional skiers on the slopes, but there are only 40 days a year when the extra capacity will be needed. (Assume that Deer Valley Lodge will sell all 300 lift tickets on those 40 days.) Running the new lift will cost $500 a day for the entire 200
References: 1. Irfanullah, Jan. (2013). “Net Present Value”. Accounting Explained. Retrieved on 24th May 2015 from: http://accountingexplained.com/managerial/capital-budgeting/npv 2. Wilkinson, J. (2015). “Net Present Value Method”. The Strategic CFO. Retrieved on 24th May 2015 from: http://strategiccfo.com/wikicfo/net-present-value-method/ 3. Finance Formulas. (2015). “Net Present Value”. Retrieved on 24th May 2015 from: http://www.financeformulas.net/Net_Present_Value.html 4. Finance Formulas. (2015). “Equivalent Annual Annuity”. Retrieved on 24th May 2015 from: http://www.financeformulas.net/Equivalent_Annual_Annuity.html 5. AIU. (2015). “MACRS Depreciation Table”. Retrieved on 24th May 2015 from: https://classroom.aiu-online.com/app/classResourceRedirect.html?id=1872277&url=../File/539515/1872277/1/Open 6. AIU. (2015). “Time Value of Money Table”. Retrieved on 24th May 2015 from: http://www.flexstudy.com/demo/demopdf/96019_appendix.pdf