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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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...

...Net Present Value
Net present value (NPV) and Internal rate of return (IRR) are used to determine whether to accept a project or not.Net Present Value (NPV)Net present value is the difference between the present value of cash inflows and the present value of cash outflows. It is used in capital budgeting to analyze the profitability of an investment or project.
NPV= sum[CFt/(1+r)t]-C0
CFt– cash flow in the time t
C0 – initial investment
r – periodic interest rate
NPV rule:
Accept all independent projects with NPV greater than 0 as they add value to shareholder. In case of mutually exclusive projects, the project with the highest NPV should be chosen
Advantages:
Direct measure of the dollar contribution to the stockholders.
NPV method is preferable for non-normal cash flows (e.g. negative cash flows)
Disadvantage:
Does NOT measure the project size.
Internal Rate of Return (IRR)
The discount rate makes the net present value of all cash flows from a project equal to zero. The higher a project's internal rate of return, the more desirable it is to undertake the project. IRR can be used to rank several prospective projects a firm is considering.
NPV= Sum[CFt/(1+r)t]–C0
r = internal rate of return (IRR)
IRR rule:
Accept all independent projects with IRR greater than cost of capital. In case of mutually exclusive projects, the project with...

...government regulations. There are three categories of investment decisions: acceptance or rejection, ranking of projects, and choosing between projects. To assess whether it is viable to invest or not the NPV technique can be used to compare the present value of returns and costs. If the NPV is negative it implies that costs exceed returns and hence it would not be advisable to invest in such projects. There are also other investment appraisal techniques that are employed apart from the NPV; these are the pay back method, accounting rate of return and internal rate of return method.
Net present value (NPV) is generally considered as the most correct method for investment
appraisal because it focuses on cash and takes into account the time value of money and riskiness
of the investment project. The method is hence consistent with the objective of shareholder
wealth maximization (Shapiro, 2005). The net present value of an investment project is the
present value of the net cash inflows less the project’s initial investment outlay. If the resulting
NPV is positive, the company should accept the investment project; if it’s negative, the project
should be rejected. In mutually exclusive projects, the investment with higher net present value
should be accepted (Drury, 2004).
The use of NPV technique, which is the most appropriate to evaluate investment projects, require the identification of a...

...Comparing Net Present Value and Internal Rate of Return
by Harold Bierman, Jr
Executive Summary
• • • Net present value (NPV) and internal rate of return (IRR) are two very practical discounted cash flow (DCF) calculations used for making capital budgeting decisions. NPV and IRR lead to the same decisions with investments that are independent. With mutually exclusive investments, the NPV method is easier to use and more reliable.
Introduction
To this point neither of the two discounted cash flow procedures for evaluating an investment is obviously incorrect. In many situations, the internal rate of return (IRR) procedure will lead to the same decision as the net present value (NPV) procedure, but there are also times when the IRR may lead to different decisions from those obtained by using the net present value procedure. When the two methods lead to different decisions, the net present value method tends to give better decisions. It is sometimes possible to use the IRR method in such a way that it gives the same results as the NPV method. For this to occur, it is necessary that the rate of discount at which it is appropriate to discount future cash proceeds be the same for all future years. If the appropriate rate of interest varies from year to year, then the two procedures may not give identical answers. It is easy to use the NPV method correctly. It is much more difficult to...

...“THE ADVANTAGES AND DISADVANTAGES OF USINFG NPV (NET PRESENT VALUE) AND IRR (INTERNAL RATE OF RETURN)”
NPV (NET PRESENT VALUE)
The difference between the present value of cash inflows and the present value of cash outflows. NPV is used in capital budgeting to analyze the profitability of an investment or project. NPV analysis is sensitive to the reliability of future cash inflows that an investment or project will yield.NPV compares the value of a dollar today to the value of that same dollar in the future, taking inflation and returns into account. If the NPV of a prospective project is positive, it should be accepted. However, if NPV is negative, the project should probably be rejected because cash flows will also be negative.
Net present value, or NPV, is one of the calculations business managers use to evaluate capital projects. A capital project is a long-term investment or improvement, such as building a new store. The NPV calculation determines the present value of the project's projected future income. In the calculation, the present value of the project's cost is subtracted from the present value of future income. A positive net present value usually means you should accept or implement the project. Business owners who compare two or more projects tend to favor the one with the higher net present value.
ADVANTAGES OF NET PRESENT...

...NPV is short for Net Present Value and it makes difference between the present value and cost of a project. In addition, NPV takes into account all cash flows through out the whole life of the projects, as well as the time value of money. And it compares like with like as all inflows and outflows are discounted to today¡¯s date. Also, the cost of capital is very unlikely to be changed over a period of time. To judge if the NPV is good, we should see the value of it, and the rule is the high the better. But, there is a rule for NPV, which is When NPV is greater than 0 we accept it, when the NPV is less than 0 we reject it. What is more, the net present value rule states that managers increase shareholders¡¯ wealth by accepting all projects that are worth more than they cost. Therefore, they should accept all projects with a positive net present value. When choosing between mutually exclusive projects, the decision rule is simple. Calculate the NPV of each project and, from those options that have a positive NPV, choose the one whose NPV is highest. In Fisher¡¯s separation theorem, it states that companies can make their investment decisions independently of individual shareholders¡¯ consumption decision by using the NPV rule. Moreover, the formula of NPV is NPV=PV-required investment, and there is a...

...**What is NPV?**
a) If the value of NPV is greater than 0, then the project is a go! In other words, it's profitable and worth the risk.
b) If the value of NPV is less than 0, then the project isn't worth the risk and is a no-go.
So NPV takes risk and reward into consideration, which is why we use it in the world of corporate finance and capital budgeting.
**Example**
In order for us to calculate NPV, let's use the following example.
Suppose we'd like to make 10% profit on a 3 year project that will initially cost us $10,000.
a) In the first year, we expect to make $3000
b) In the second year, we expect to make $4300
c) In the third year, we expect to make $5800
**Calculation step 1**
Right now, the project is going to cost us $10,000. So we won't be making any money until at least a year from now. What we need to do is calculate how much each of those future profit amounts will be worth right here, today.
This means we need to calculate the present value of each of those 3 cash flows we'll be getting over the next three years. In other words:
a) How much is that $3000 one year from now worth today?
b) How much is that $4300 two years from now worth today?
c) How much is that 5800 worth three years from now worth today?
The answers to each of these three questions is the present value for that particular cash inflow.
**Calculation step 2**
In example,...

...Examples Of Net Present Value (NPV), ROI and
Payback Analysis
Introduction
Terms and Definitions
Net Present Value - Method of calculating the expected net monetary gain or loss from a project by discounting all expected future cash inflows and outflows to the present point in time.
Discount Rate - Also known as the hurdle rate or required rate of return, is the rate that a project must achieve in order to be accepted rather than rejected.
Return on Investment – Expected income divided by the amount originally invested
Payback Analysis – The number of years needed to recover the initial cash outlay.
Formulas
Net Present Value = (t=1..n A * (1+r)-t OR (t=1..n A/ (1+r)t
Where A = Cash flow
r = Required rate of return
t = year of cash flow
n = the nth year
Return On Investment = (Discounted Benefits – Discounted Costs) / Discounted Costs
Payback Period = Years taken to repay initial outlay .
Eg. Project Z Outlay = $ 4000
Yearly cash flows = $2000
Payback period = 2yrs
Examples
• Required rate of Return = 10%
|Project A | Year 1...