The purpose of the following analysis is to determine whether PowerCo, a medium sized power company in the southeast United States should build a new generator. It is the belief of PowerCo that demand for electricity will significantly increase over the next 1012 years. In order to meet this demand, the investment in a new generator needs to be reviewed. PowerCo’s Treasury department has prepared financial projections to facilitate the analysis of the investment. This information will be used for the analysis in order to provide a recommendation of whether PowerCo should build or not build the new generator.
The Present Value of the expected costs is $47.146 million dollars. Calculations are listed below: YearCost x PVIF (I, N)= Present Value
125PVIF(8,1) (.926)= 23.15
228PVIF(8,2) (.857)= 23.996
Total PV= 47.146
The Present Value of the expected aftertax cash profits are $47.235 million dollars. Calculations are listed below: YearCash Inflow x Interest Factor = Present Value
36.7944.764
47.7355.145
58.6815.448
69.6305.67
79.5835.247
89.5404.86
99.5004.5
109.4634.167
119.4293.861
129.3973.573
Total PV47.235
The expected Net Present Value of the investment is $89,000. This number, a positive Net Present Value, represents that the future cash inflows at the company’s cost of capital (8%) will cover the cost of the investment. This also increases the value of the company. Should the Net Present Value have been a negative amount, it would represent that the future cash inflows would not cover the cost of the investment. Calculations are listed below: NPV = PVI – PVO
NPV = 47.23547.146
NPV = .089
There are risks to take in consideration when reviewing this information. Although the Treasury department has provided financial projections...
...Netpresent value
In finance, the netpresent value (NPV) or netpresent worth (NPW) of a time series of cash flows, both incoming and outgoing, is defined as the sum of the present values (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 present value 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 present value (PV). Then they are summed. Therefore NPV is the sum of all terms,
,
where
t  the time of the cash...
...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.
现金流入的现值和现金流出的现值之间的差额。 NPV是用在资本预算分析的投资或项目的盈利能力。
The netpresent value of a project is the present value of current and future benefit minus the present value of current and future costs.
一个项目的净现值是当前和未来的收益减去当前和未来成本的现值的现值。
Payback Period allows investors to assess the risk of an investment attributable to the length of its investment life.
Easy to calculate and understand.
Limitations
Basic payback period ignores the time value of money. This limitation can be overcome by applying the discounted payback period.
Payback period does not take into account the level of cash flows of an investment after the payback period. In other words, payback period ignores the overall profitability of investments.
Basic payback period can be difficult to calculate where multiple negative cash flows are incurred during the investment period. This problem can be solved by calculating the modified payback period as discussed above.
Payback period does not provide a theoretically absolute decision rule like other appraisal methods (e.g. all investments with positive NPV should be accepted) and is therefore susceptible to subjective interpretation.
Explanation
Payback Period is the duration needed to recover the...
...companies
* However, it is found inappropriate to use DCF methods for investments that have got strategic implications.
* There are various reasons for the use of open approach. Since the outcomes of these projects are highly unforeseen, according one interviewee, the application of quantitative tools is not plausible. Therefore, companies tend to apply the rule of thumb methods rather than standardized quantitative models. The justification for not applying quantitative models is some times attributed to the nature of a project.
Capital inv appraisal of new technologies: Problems, misconceptions and research directions
* Specifically, it has been alleged that the traditional appraisal methods of payback,
discounted netpresent value (NPV) and internal rate of return (IRR) undervalues the longterm
benefits; that traditional financial appraisals assume a far too static view of future industrial
activity, underrating the effects and pace of technological change; that there are many benefits
from investments in new technology which are difficult to quantify and are often ignored in the
appraisal process; and lastly, it is claimed that the systems of management control often employed
by large organizations compound the bias against those investments which, although expensive,
reap rewards vital for longterm viability. The first issue is a criticism of financial technique; the
next two are criticisms of the way in which...
...Examples Of NetPresent Value (NPV), ROI and
Payback Analysis
Introduction
Terms and Definitions
NetPresent 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
NetPresent 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 =...
...budgeting decision? a Whether to acquire a subsidiary company. b Whether to expand a product line. c Whether to fill a special order. d Whether to purchase a fleet of trucks. 2 Which of the following is an example of a nonfinancial consideration in capital budgeting? a Will an investment generate adequate cash flows to promptly recover its cost? b Will an investment generate an acceptable rate of return? c Will an investment have a positive netpresent value? d Will an investment have an adverse effect on the environment? 3 Which of the following is not considered when using the payback period to evaluate an investment? a The profitability of the investment over its entire life. b The annual net cash flow of the investment. c The cost of the investment. d The expected life of the investment. Use the following data for questions 4 and 5. Stone Mfg. is considering expanding operations by investing $300,000 in equipment. The equipment has a useful life of eight years, with no salvage value. Straightline depreciation is used. Stone predicts that net income will increase $37,500 per year as a result of this strategy. 4 Refer to the above data. The payback period for this investment is: a 8 years. b 4 years. c Over 13 years. d 2.5 years. 5 Refer to the above data. Return on average investment for this investment is: a 25%. b 20%. c 12 1/2%. d 15%.
CHAPTER 26 10MINUTE QUIZ B
NAME SECTION
#
Physician’s Pharmacy...
...targets to consider in the decisionmaking process. The netpresent value method is one of the useful methods that help financial managers to maximize shareholders’ wealth. The capital budgeting decision mergers Acquisitions
NetPresent Value
Financial managers are working for the shareholders and their primary goal is profit maximization in order to maximize the wealth of the company and the shareholders. The Capital budgeting decision focuses on the netpresent value method, the payback period, and the internal rate of return method. This paper has two parts, where the first aspect relates to the capital budgeting decision. This paper will recommend if Goggle should accept a new project by using the netpresent value method. Next, the paper will discuss Google's potential acquisition of Groupon and if it will add value to the shareholders of both corporations. Finally, this paper will make a recommendation to Goggle and Groupon on the best course of action for a merger or acquisition.
Part I
First, a financial manger has to make optimal decisions they will benefit the company. A financial manger has to know how to make money and smart investments in order to raise capital and put the money back into the company. The netpresent value is an important concept and useful tool to...
...Initial investment
An initial investment is the money a business owner needs to start up a firm. It might include the business owner's own money, money borrowed from an array of sources including family and friends or banks, or capital raised from investors. The term initial investment is also used as the money a business owner uses to invest in a capital investment venture such as a piece of equipment or a building.
IRR
The higher a projects internal rate of return, the more desirable it is to invest in the project. Some ways to use the IRR method are:
• Discounted Cash Flow Analysis  Find the interest rate return that you would receive as your investment return rate.
• Capital Budget Planning  Go through the capital budget process so that you make the best economic decision.
• Discounted Cash Flow Analysis  When you calculate IRR you will have one number for an objective comparison between capital projects.
• Investment Calculator  Determine if a potential investment is a good choice or not.
• Compound Rate of Return  Understand the compounding effect of interest on investments. ("Calculating internal rate,")
Deciding between investments
You are deciding between two mutually exclusive investment opportunities. Both require the same initial investment of $10 million. Investment A will generate $2 million per year (starting at the end of the first year) in perpetuity. Investment B will generate $1.5 million...
...
FINC5001 Capital Market and Corporate Finance

Workshop 5 – Capital Budgeting II
1. Basic Concepts Review
a) In applying NetPresent Value, 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 
Costs   750  900 ...
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