The firms 100000 required rate of return is 15 15 npv

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Unformatted text preview: mple NPV Suppose we are considering a capital Suppose investment that costs $250,000 and $250,000 provides annual net cash flows of $100,000 for five years. The firm’s $100,000 required rate of return is 15%. 15% (250,000) 100,000 100,000 100,000 100,000 100,000 0 1 2 3 4 5 Net Present Value (NPV) Net NPV is just the PV of the annual cash NPV flows minus the initial outflow. flows Using TVM: P/Y = 1 N = 5 P/Y PMT = 100,000 PMT I = 15 PV of cash flows = $335,216 PV $335,216 - Initial outflow: ($250,000) Initial ($250,000) = Net PV $85,216 Net $85,216 NPV with the HP10B: NPV -250,000 CFj -250,000 CFj 100,000 CFj 100,000 CFj 5 shift Nj 15 I/YR 15 shift NPV You should get NPV = 85,215.51. You 85,215.51 Profitability Index Profitability Profitability Index Profitability n NPV = Σ t=1 ACFt ACF t (1 + k) - IO Profitability Index Profitability n NPV = Σ t=1 n PI = PI Σ t=1 ACFt ACF t (1 + k) - IO ACFt ACF (1 + k) t IO Profitability Index • Decision Rule: • If PI is greater than or equal If to 1, accept. accept • If PI is less than 1, reject. If reject PI with the HP10B: PI -250,000...
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