Ifprojectsaremutuallyexclusiveaccept

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Unformatted text preview: ll meet our goal. What is Project L’s NPV? What is Project L’s NPV? Year CFt PV of CFt 0 1 2 3 ­100 10 60 80 NPVL = ­$100 9.09 49.59 60.11 $18.79 NPVS = $19.98 Solving for NPV: Solving for NPV: Financial calculator solution Enter CFs into the calculator’s CFLO register. CF0 = ­100 CF = 10 1 CF = 60 2 CF = 80 3 Enter I/YR = 10, press NPV button to get NPVL = $18.78. Rationale for the NPV method Rationale for the NPV method NPV = PV of inflows – Cost = Net gain in wealth If projects are independent, accept if the project NPV > 0. If projects are mutually exclusive, accept projects with the highest positive NPV, those that add the most value. In this example, would accept S if mutually exclusive (NPVs > NPVL), and would accept both if independent. Example 2 Example 2 You are looking at a new project and you have estimated the following cash flows: Year 0: CF = ­165,000 Year 1: CF = 63,120; NI = 13,620 Year 2: CF = 70,800; NI = 3,300 Year 3: CF = 91,080; NI = 29,100 Average Book Value = 72,000 Your required return for assets of this risk is 12%. Computing NPV for the Project Computing NPV for the Project Using the calculator: CF0 = ­165,000; C01 = 63,120; F01 = 1; C02 = 70,800; F02 = 1; C03 = 91,080; F03 = 1; NPV; I = 12; CPT NPV = 12,627.42 Do we accept o...
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This document was uploaded on 01/14/2014.

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