Therefore since our goal is to increase owner wealth

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Unformatted text preview: th, NPV Since 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 money? money? Does the NPV rule account for the risk of the Does cash flows? cash Does the NPV rule provide an indication about Does the increase in value? the Should we consider the NPV rule for our primary Should decision rule? decision 9 Calculating NPVs with a Calculating Spreadsheet Spreadsheet Spreadsheets are an excellent way to compute Spreadsheets NPVs, especially when you have to compute the cash flows as well. the Using the NPV function The first component is the required return entered The as a decimal as The second component is the range of cash flows The beginning with year 1 beginning Subtract the initial investment after computing the Subtract NPV NPV 10 10 Payback Period How long does it take to get the initial cost back How in a nominal sense? in Computation Estimate the cash flows Subtract the future cash flows from the initial cost until Subtract the initial investment has been recovered the Decision Rule – Accept if the payback period Decision is less than some preset limit is 11 11 Computing Payback for the Computing Project Project Assume we will accept the project if it pays back Assume 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 Year 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 Does value of money? value Does the payback rule account for the risk of the Does cash flows? cash Does the payback r...
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