Comments on: How to calculate net present value (NPV) – an introduction

By: Siva

Siva — Wed, 08 Feb 2012 10:18:35 +0000

Ya its nice. But i didn’t get the right information. Sorry

By: Stuart - like the mouse

Stuart - like the mouse — Mon, 06 Feb 2012 19:04:44 +0000

Considering purchasing new equipment to manufacture a new product line. The new equipment would allow for manufacturing 100,000 additional products per year and useful life expectancy of 5 years, w/ no salvage value. (Depreciation effects in concern re: equipment using straight-line method.) Product will sell at an average of $20 w/ $8 manufacturing cost, for the new equipment. Indirect costs remain the same. Equipment costs $3,000,000 to purchase and install, the tax rate is 34%. Could you please explain how I might go about calculating by way of an Excel spreadsheet? Along with any formulas and/or functions that would be included? Thank you so much! By the way I love this site! You have taught me so much!

By: (graphing|calculator|calculators|reviews|reviewed)

(graphing|calculator|calculators|reviews|reviewed) — Mon, 09 Jan 2012 04:34:49 +0000

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By: EMJ

EMJ — Sun, 18 Dec 2011 00:48:03 +0000

(Inflation question) A project’s initial investment is $40,000, and it has a five-year life. At the end of the fifth year, the equipment is expected to be sold for $12,000, at which time its net book value will be $5,000. The CFATs (including inflation, depreciation, and net salvage value) for the next five years are expected to be $20,000, $25,000, $10,000, $10,000, and $10,000. In real terms, the project’s cost of capital is 10%, and the riskless return is 7%. The tax rate is 46%, and the inflation rate is 3%. What is the project’s NPV?

By: Olga

Olga — Tue, 13 Dec 2011 15:28:23 +0000

I’m a student and I should decide this problem. Please, help me, if you can!!
A German ﬁrm can invest 20 Mio. Euro in a new machine to generate an additional
annual taxable cash ﬂow of 10 Mio. Euro over the next four years. The machine
has to be depreciated linearly over four years. The ﬁrm can borrow and invest at
5% p.a. in GBP and for 10% p.a. in Euro. If the ﬁrm borrows money at one of
these rates the principal amount has to be paid back in year 4. The corporate tax
rate is 30%. Today the exchange rate is 1 ¿/GBP.
a) Calculate the after tax cash ﬂows in ¿ of the investment project excluding the
loan. (5 Points)
b) What is the net present value of the project if funded by a ¿-loan? (3 Points)
Now consider funding by a GBP-loan. Assume that the term structure of interest
rates is ﬂat in both countries and that covered interest parity holds.
c) Derive the forward foreign exchange rates for t=1,2,3,4. Ignore taxes for this
calculation.
5d) Would you obtain other forward exchange rates if all interest expenses and
revenues and all proﬁts/losses from currency exchanges are taxed at the same
rate?
Derive your answer for an investor who borrows 1¿ for one year, invests it
in GBP and changes the money back at the forward rate after one year. De-
rive terminal wealth before taxes ﬁrst and then terminal wealth after taxes.
e) Calculate the cash ﬂows of the project in Euro when it is ﬁnanced with a GBP
loan. Assume that all gains and losses are tax relevant and that the GBP-cash
ﬂows are fully hedged in the forward market.
f) Calculate the net present value for the project with a GBP loan. Compare the
result to the result you obtained in b).

By: syeda

syeda — Mon, 12 Dec 2011 21:33:50 +0000

I need help for above question, plz any 1 can???

By: syeda

syeda — Mon, 12 Dec 2011 21:32:58 +0000

MyCompany Plc is a company currently engaged in manufacturing of toys. It wishes to diversify into the manufacturing of mobile phones. The investment details: The company’s equity beta is 1.07 and is currently debt to equity ratio of 30:70, however the company’s gearing will change as a result of new project. Firms involved in mobile phones have an average equity beta of 1.12 and an average debt to equity ratio of 40:60 Assume that the debt is risk free, that the risk free rate is 8% and that the expected return from the market portfolio is 20%. The new project will involve the purchase of new machinery for a cost of £1200,000 (net of issue costs), which will produce annual cash inflows of £650,000 for 3 years. At the end of this time it will have no scrap value. Corporation tax is payable in the same year at a rate of 33%. The machine will attract writing down allowances of 25% p.a. on a reducing balance basis, with a balancing allowance at the end of the project life when the machine is scrapped. The financing details: The new investment will be financed as follows: Debentures (redeemable in 3 years time) :45% Rights issue of equity :55% The issue costs are 4% on the gross equity issued and 2% on the gross debt issued.Estimate the Adjusted Present Value for MyCompany Plc based on information given above.

By: Emma

Emma — Sun, 20 Nov 2011 14:25:52 +0000

I need help with this problem:
A company is considering whether to purchase a new pumping
machinery at a cost of £100k but which is expected to give rise to
additional cash inflows of £50k per year for four years. Taxation is at the
rate of 35%. Taxation is paid one year after the end of the company’s
accounting year. The machinery is eligible for 25% annual writing down
allowances. It is anticipated that the machinery will be sold at the end of
year 4 at its written down value for taxation purposes. The company
decided to use a discount rate of 10% to calculate the present value of
future cash inflows. Calculate the net present value.
Thanks in advance

By: Jane

Jane — Sat, 05 Nov 2011 05:36:09 +0000

Wooly Wanders is a New Zealand manufacturer and retailer of woolen clothes. Their machinery is getting old and they are struggling to compete with low cost imported clothes. The company is thinking of investing in new machinery which would enable them to make better quality clothes and sell at a higher price. The new machinery would also require less staff, giving a saving in labor costs. However this would mean redundancy for some long service staff. Wooly Wanderers have engaged your accounting firm to advise them on this decision.

DETAILS
The new machinery will cost $20m to buy further $4m to install. It will last for 10 years, with scrap value of $1m in 10 years. The machinery will need to be re-programmed in years 4 and 7 at a cost of $2m each time. The company should make $4m more each year through higher selling prices, with no increase in material costs. Labor saving will be $1.2m redundancy cost to be paid in year 1. The company tax rate is 30%.Assume that the redundancy payments and the machinery re-programming cost are tax deductible.
Prepare a business case for Wooly Wanderers on the capital expenditure decision. You can choose the discount rate to use but you must justify your reason. Prepare Discounted cash flow.

By: chirag

chirag — Sun, 30 Oct 2011 23:15:29 +0000

Part A
ABC Ltd is a family run company incorporated fifty years ago. It manufactures a range of basic household cleaners but in the main for two large national do-it-yourself(D-I-Y) retailers who market the products under their own brand names.
The company has six directors all drawn from the family. Two of the directors are senior and older controlling 55% of the shares. The remaining four directors are younger, controlling 45% of the shares between them.
The younger directors feel that the company needs to become more dynamic and want to change many of the traditional ways of running the business (e.g. full time salaried staff, no reliance on debt, low dividends). In addition pressure is being put on margins by the two large customers with rumours that one is seeking to obtain supplies from the Far East. Their concern is twofold. First, that the production facilities need upgrading to prevent this happening. Second, seek new customers by marketing products under their own brand.
You have been provided with the following basic information about the company’s financial history:
ABC Ltd: Summary Financial Statements 2009-2011
Balance Sheet as at 31 December 2009 2010 2011
$’000 $’000 $’000
Fixed assets (net of depreciation) 5,110 6,052 5,634
Net current assets 1,006 231 783
——— ——— ———
Net assets 6,116 6,283 6,417
——— ——— ———
Represented by:
Share capital 1,000 1,000 1,000
Reserves 5,116 5,283 5,417
——— ——— ———
6,116 6,283 6,417
——— ——— ———
Income Statement for the year ended 31 December

$’000 $’000 $’000
Sales 8,356 9,589 10,364
Cost of goods sold 5,983 6,568 7,218
——— ——— ———
Gross Profit 2,373 3,021 3,151
Selling, general and admin expense 856 998 1,032
Depreciation 836 1,022 1,210
Interest expense/(income) (46) 103 60
Directors’ salaries 360 380 380
——— ——— ———
Pre-tax profit 367 518 469
Taxation 121 171 155
——— ——— ———
Profit after tax 246 347 314
Dividends 160 180 180
——— ——— ———
Profit retained 86 167 134
——— ——— ———

The company occupies freehold premises on the outskirts of a large town. The property was bought in the 1980s and is carried in the accounts at its original cost of $400,000. The auditors have queried this treatment as the market value of the property is believed to be in the region of $3 million. However, the older directors regard the revaluation of assets as imprudent in the current economic climate.
The company has no long-term debt. It does have an overdraft facility, which fluctuates throughout the year but averages around $1 million overdrawn.
Question 1
You have been given the following information about the younger directors’ project to invest in additional manufacturing capacity:
1. The cost of the investment in today’s (September 2011) money is $8m.
2. The new plant has an estimated useful life of five years, and an estimated scrap value of 15% of its original cost in real terms.
3. Inflation is estimated at 3% per annum.
4. The company can borrow funds at 1.5% over LIBOR, which is currently 4.25%.
5. The new plant will be paid for and commissioned in June 2012.
6. Fixed costs of operating the plant will be $1.2m per annum in today’s money.
7. Variable operating costs will be 60% of sales value.
8. The project is expected to generate new sales of $7m per annum, in today’s money, if no additional marketing is undertaken (see point 10).
9. All cash inflows attract tax at 30% and all cash outflows qualify for tax relief at the same rate. Tax is payable 12 months after the end of the financial year.
10. If the company were to launch an intensive marketing campaign to raise public awareness of its new brand, new sales could be increased by 12%. The budget for the campaign would be $250,000 p.a. in today’s money) for three years starting in June 2012.
Undertake an NPV appraisal of the project. Ensure that you include sufficient documentation to enable the Board of Directors to review the NPV model. State any assumptions that you have made, including the discount rate used which could be an assessment of the WACC for ABC Ltd.

By: Mahama Haadi

Mahama Haadi — Wed, 19 Oct 2011 21:38:29 +0000

In the first year, we expect to make $3000
b) In the second year, we expect to make $4300
c) In the third year, we expect to make $5800
and how to calculate for NPV and IRR

By: Experiglot

Experiglot — Mon, 17 Oct 2011 00:46:07 +0000

@Jones – Certainly an interesting case,

the NPV would be: $30,000

I might be wrong on the standard deviation but I get: 2790000000$

I don’t think the std dev is very meaningful when you get an average of nearly 0 and such a wide range of possibilities. I guess I would use the NPV personally as well as the willingness of the owner to sustain huge losses, that while improbable are certainly possible. It then becomes more of a qualitative argument and depends more on your attitude towards risk. What are your thoughts? Personally, I think that any project that has such a wide range with an average near 0 will make the std dev basically meaningless….

By: Jones

Jones — Mon, 10 Oct 2011 15:16:59 +0000

Can anyone show me how to figure this out?

The managers of merton medical clinic are analyzing a proposed project. The project’s most likely NPV is $120,000, but as evidence by the following NPV distribution, theres is considerable risk involved.

Probability NPV
.05 (700000)
.2 (250,000)
.5 120,000
.2 200,000
.05 300,000

A. What are the projects expected NPV and standard deviation of NPV?
B.Should the base case analysis use the most likely NPV or the expected NPV? Explain your answer?

By: Victoria

Victoria — Fri, 23 Sep 2011 06:14:22 +0000

You are a bank manager. Mister Kent is considering starting up a retail business. In order to obtain a loan from your bank, Mister Kent has prepared the following schedule of net cash flows for you.

Initial Outlay Annual Cash Flows
Year 0 – RM30 000
Year 1 – RM5 000
Year 2 + RM5 500
Year 3 + RM10 000
Year 4 + RM10 000
Year 5 + RM10 000
Year 6 onwards + RM15 000
Given a required rate of return of 14%

Compute the value of the cash flows from Year 6 onwards. State the value today of this enterprise. As a bank manager, from you position point of view, recommend to the bank and request the addition information from Mister Kent.

Can anyone help me on this??

By: Stu

Stu — Thu, 01 Sep 2011 20:39:43 +0000

Please assist as I am new to NPV.

I saw this example and dont understand how it is calculated “what is expected to be made at the end of each year”. How does one get to these figures.

year 1 – 3000 ????
year 2 – 4300 ????
year 3 – 5800 ????

**Example**

In order for us to calculate NPV, let’s use the following example.

Suppose we’d like to make 10% profit on a 3 year project that will initially cost us $10,000.

a) In the first year, we expect to make $3000
b) In the second year, we expect to make $4300
c) In the third year, we expect to make $5800