Net Present Value Analysis (NPV) Disc. Net Initial Investnt Projected Cash Ialew

ID: 2613817 • Letter: N

Question

Net Present Value Analysis (NPV) Disc. Net Initial Investnt Projected Cash Ialew Tetal NPV Project Year 1: RM14.000 Year 2: RM14.000 Year 3: RM 14,000 Year 4: RM14.000 Year 5: FM14.000 Year 1: RM28.000 Yoar 2: RM12.000 Year 3: RM10.000 Year 4: RM10.000 Year 5: RM 10.000 r= 10% @ 0.10 required rate of return PROJECT COST MANAGEMENT cont. Economic Proiect Selection Criteria- cont. Exercise 1: A three year project has projected net cash flow of S25,000 S30,000 and S35,000 in the next three years. I will costs $50,000 to implement the project. If the required rate of return is 20%, conduct a discounted cash flow to determine the NPV 35 PROJECT COST MANAGEMENT cont. Financial returns, while important does not always reflect strategic importance. WHY??

Explanation / Answer

Net Present Value Anaysis question is not clear so the answer for that part is not being provided.

Solution for Exercise 1:

The formula for NPV varies slightly depending on the consistency with which returns are generated. If each period generates returns in equal amounts, the formula for the net present value of a project is:

NPV = C x {(1 - (1 + R)-T) / R} ? Initial Investment

Where C is the expected cash flow per period, R is the required rate of return, and T is the number of periods over which the project is expected to generate income.

However, many projects generate revenue at varying rates over time. In this case, the formula for NPV is:

NPV = {(C for Period 1 / (1 + R)1) + (C for Period 2 / (1 + R)2) ... (C for Period x / (1 + R)x)} - Initial

Investment

Calculation of Net Present Value

Particulars

Year 0

Year 1

Year 2

Year 3

Initial Investment

$50,000

Cash Inflows (C)

$25,000

$30,000

$35,000

Required rate of return (R)

20%

Since our question has many projects we will use this formula:

NPV = {(C for Period 1 / (1 + R)1) + (C for Period 2 / (1 + R)2) + (C for Period 3 / (1 + R)3)} - Initial

Investment

= {($25000 / (1 + 0.20)1) + ($30000 / (1 + 0.20)2) + ($35000 / (1 + 0.20)3)} – $50,000

= ($17,361 + $17,361 + $20,255) – $50,000

= $4,977

Since the NPV is positive, accept the project.