Unformatted text preview: th, NPV
is a direct measure of how well this project will
meet our goal.
meet 7 Computing NPV for the Project Using the formulas: Using the calculator: NPV = 63,120/(1.12) + 70,800/(1.12)2 + 91,080/
(1.12)3 – 165,000 = 12,627.42
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
CPT Do we accept or reject the project? 8 Decision Criteria Test - NPV Does the NPV rule account for the time value of
Does the NPV rule account for the risk of the
Does the NPV rule provide an indication about
the increase in value?
Should we consider the NPV rule for our primary
decision 9 Calculating NPVs with a
Spreadsheet Spreadsheets are an excellent way to compute
NPVs, especially when you have to compute
the cash flows as well.
Using the NPV function The first component is the required return entered
as a decimal
The second component is the range of cash flows
beginning with year 1
Subtract the initial investment after computing the
10 Payback Period How long does it take to get the initial cost back
in a nominal sense?
Computation Estimate the cash flows
Subtract the future cash flows from the initial cost until
the initial investment has been recovered
the Decision Rule – Accept if the payback period
is less than some preset limit
11 Computing Payback for the
Project Assume we will accept the project if it pays back
within two years.
within Year 1: 165,000 – 63,120 = 101,880 still to recover
Year 2: 101,880 – 70,800 = 31,080 still to recover
Year 3: 31,080 – 91,080 = -60,000 project pays back
in year 3
in Do we accept or reject the project? 12
12 Decision Criteria Test - Payback Does the payback rule account for the time
value of money?
Does the payback rule account for the risk of the
Does the payback r...
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This document was uploaded on 03/01/2014 for the course FINANCE 250 at Indiana.
- Spring '14
- Net Present Value