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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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