Npv Wpc

Topics: Investment, Net present value, Capital accumulation Pages: 2 (627 words) Published: April 24, 2013
Net Present Value
Net Present Value (NPV) is used in capital budgeting to analyze the profitability of an investment or project. NPV is found by subtracting the present value of the after-tax outflows from the present value of the after-tax inflows. Investments with a positive NPV increase shareholder value and those with a negative NPV reduce shareholder value. In order to compute the NPV for Worldwide Paper Company, we have to calculate the cash flow in capital budgeting of the project as below. | | 2007| 2008| 2009| 2010| 2011| 2012| 2013| Terminal Cash flow| A| Fixed Assets| | | | | | | | |

| Cost of Investment| -$16| -$2| | | | | | |
| Sales of Fixed Asset| | | | | | | | $1.08|
B| Working Capital| | | | | | | | |
| Incremental Sales| | $4| $6| | | | | |
| Change in Working Capital (10%)| | $0.4| $0.6| | | | | | | Cash flow of investment in working capital| | -$0.4| -$0.6| | | | | $1.0| C| Operating Cash Flow| | | | | | | | |

| Revenue of Investment| | $4| $10| $10| $10| $10| $10| | -| Cost of Good Sold (75%)| | -$3| -$7.5| -$7.5| -$7.5| -$7.5| -$7.5| | -| SG&A expenses (5%)| | -$0.2| -$0.5| -$0.5| -$0.5| -$0.5| -$0.5| | | Net Income| | $0.8| $2| $2| $2| $2| $2| |

+| Operating Saving| | $2| $3.5| $3.5| $3.5| $3.5| $3.5| | -| Depreciation| | $3| $3| $3| $3| $3| $3| |
| EBIT| | -$0.2| $2.5| $2.5| $2.5| $2.5| $2.5| |
-| Tax (40%)| | -$0.08| $1| $1| $1| $1| $1| |
| EAT| | -$0.12| $1.5| $1.5| $1.5| $1.5| $1.5| |
+| Add back Depreciation| | $3| $3| $3| $3| $3| $3| | | Total Operating Cash Flow| | $2.88| $4.5| $4.5| $4.5| $4.5| $4.5| | D| Total Project Cash Flow (A+B+C)| -$16| $0.48| $3.9| $4.5| $4.5| $4.5| $4.5| $2.08| Figure 1: Worldwide Paper Company Cash Flow in Capital Budgeting (in millions). As we can see in figure...
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