1 the net present value is the present value of all

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Unformatted text preview: creating value for the firm? 9-6 Net Present Value (NPV) 9.1 • The net present value is the present value of all expected future cash benefits minus the costs. • Note that the present value of all expected future cash benefits is also called the market value • If the NPV > 0, then accept the project. If the NPV < 0, then reject the project. • Performing the NPV calculation is simple using tools from financial math • The more difficult element is figuring out what expected future cash flows to use (see chapter 10) and how to estimate the required return for projects of this risk level (see chapter 13). 9-7 NPV Example #1 • You are looking at a new project and you have estimated the following cash flows: • • • • Costs in year 0: -165,000 Year 1: CF = 63,120 Year 2: CF = 70,800 Year 3: CF = 91,080 • Your required return for assets of this risk is 12%. • Technique: you need to take the present value of these future cash flows. • Use the NPV button on your calculator to compute the present value of uneven cash flows. 9-8 Computing NPV for the Project • Using the formulas: • NPV = 63,120/(1.12) + 70,800/(1.12)2 + 91,080/(1.12)3 – 165,000 = 12,627.42 • Using the BAII Plus calculator: • Use CF and arrow keys to enter the following: CF0 = -165,000; C01 = 63,120; F01 = 1; C02 = 70,800; F02 = 1; C03 = 91,080; F03 = 1; NPV; I = 12; CPT NPV = 12,627.41 • Using the Casio calculator: • F3 Cash flow under Financial. Enter 12 under I%, and LIST to enter the cash list. Enter -165000 under 1, 63120 under 2, 70800 under 3 and 91080 under 4. Exit from list and hit NPV to compute the NPV. Result is 12,627.41. • Do we accept or reject the project? • We accept, since the NPV is positive. 9-9 NPV Example #2 • A Canadian firm is deciding whether to expand to the U.S. If they proceed, then they expect to incur costs of $10m. The expected financial benefits of this expansion can be broken down as $2m in years 1 and 2, $4m in years 3 and 4 and $5m in year...
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This document was uploaded on 02/06/2014.

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