Overall Net Present

Topics: Net present value, Investment, Capital budgeting Pages: 3 (621 words) Published: November 6, 2011
Principles of Finance

Final Project

PowerCo

Instructor:

Date Submitted:

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 10-12 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 after-tax 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 = 47.235-47.146
NPV = .089

There are risks to take in consideration when reviewing this information. Although the Treasury department has provided financial projections...
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