0 views

Uploaded by CleonSciaxe

Risk Management

- 216547270-Chap-009
- Lecture17-18
- TVMPracticeProb.docx
- simulation.pdf
- Ef 5370 Lecture 1
- Value
- Business Mathematics
- Chapter 26 - Answer
- chapter05.pdf
- Financial Analysis
- Financial
- Chap014.ppt
- 16R-90
- Automation of Inventory Mgm-Synopsis (1)
- Ch 3
- Gemstone
- Ileco 3 2016-001+RC_SIPCILECOIII.pdf
- Investment Appraisal
- Kim Hotels is Interested in Developing a New Hotel in Seoul
- Acctg 22 - Chapter 10 Quiz 1

You are on page 1of 3

monetary value due to the unpredicted cash outflow and inflow. There have

been several methods introduced and used throughout the world, but the Net

Present Value (NPV) method was found to be one of the most useful and

reliable technique for this process. It is the difference between the present

value of the expected cash inflows in future and the amount invested on the

project. NPV incorporates the time value of money (TVM) for its future cash

inflow calculation, which is a very important concept and terminology widely

discussed and utilized even in the introductory finance. The concept of TVM

could simply be explained as the difference in value of money with respect to

time. Because, money in the present is worth more than the same amount in

the future. Apparently, this could be justified based on 'inflation' or say the

extra earnings/'interests' that could potentially be made using that same

investment during the intervening time. In short, a dollar which you might get

tomorrow is probably less worthy than a dollar in your hand right now.

So, while calculating the future returns or cash inflow of a project, this

deterioration in money value has to be taken into account. The NPV

successfully incorporate this discount rate element into its calculation and is

hence generally viewed as a more credible and reliable method of calculating

the present value of a project. The present value thus calculated for the

expected cash flows by discounting them at the required rate of return (Kurt D.

,2017). Let's consider an example, Say a project with a 1 year span has a total

investment of $1000 and is expected get a revenue of say $2000 in that year.

Here the investment is cash outflow and the revenue is cash inflow. But we

cannot take into consideration the total $2000 as cash inflow, as its the money

we might get in future. Hence we have to discount this revenue by a discount

rate, say 10%. So, by discounting 10% to future $2000 gain (using eq.a), we

consider only $1818 as cash inflow. Now the total Net present value is

$1000+$1818=$818. Hence the total net present value after discounting the

future return is $818. A zero net present value means that the project repays

the original investment which were put on the project plus the required rate of

return, which could be same as investing the money in a bank and collecting

the interest revenue.

A positive net present value means a better return, indicating that the

projected earnings generated exceeds the anticipated costs, which

recommends, that it will be a good idea to go forward with the project. And a

negative net present value means a worse return, in which case it's better to

discard the project as it will probably result in a net loss (Taylor &

Francis,2017). The discount rate element to be considered for NPV calculation

is to be determined based on many factors. Different companies follow

different methodologies in determining this rate, of which a more popular one

is using the expected return of other investments of having similar

characteristics, risks and rewards (Kurt, D. ,2017). . The interest rate charged

for borrowing money for the investment of a project could also be a good

indication of the prevalent discount rate. Financing institutions and banks

calculate their interests rate on loans based on similar ideology.

Let's consider the expected future amount be F and the present value of this

amount be 'P'. Now let the interest rate considered be i, and the number of

years after investment where the revenue is expected be 'n'.

1

F = P(1 + 𝑖)n 𝑜𝑟 P=F (Eq. a)

(1 + 𝑖)n

1

Here is the Present Value factor or Discount factor.

(1+𝑖)n

If the project is expected to gain the same amount of cash inflow every year

continuously for say 'n' number of years , we can use the annuity formulae.

Consider 'A' as cash inflow (same for all the years).

1 1 1 1

P = A { (1+𝑖)1 + (1+𝑖)2 + (1+𝑖)3 … … … + (1+𝑖)1 }

(1+𝑖)n − 1

P= A (Eq. b)

𝑖.(1+𝑖)n

(1+𝑖)n − 1

Here is the Present Value factor for an annuity

𝑖.(1+𝑖)n

Now to find the Net present value of a project,

L𝑛

NPV= -I0 + (B − C)𝑃𝑉𝐹𝑖,𝑛 +

(1+𝑖)𝑛

B - Annual net benefits

C - Annual net costs

i - Discount rate

n - Number of years

(1+𝑖)n − 1

𝑃𝑉𝐹𝑖,𝑛 = - Present value factor for annuity

𝑖.(1+𝑖)n

L𝑛 - Liquidation yield

*Calculations to be added

*Annual income/expense, Project life span, Resale value to be finalized.

REFERENCE

Scott, M. (2011). Small company economics–net present value versus net cash

flow. The APPEA Journal, 51(1), p.369.

Taylor & Francis. (2017). FREE CASH FLOW (FCF), ECONOMIC VALUE ADDED

(EVA™), AND NET PRESENT VALUE (NPV):. A RECONCILIATION OF VARIATIONS

OF DISCOUNTED-CASH-FLOW (DCF) VALUATION. [online] Available at:

http://www.tandfonline.com/doi/abs/10.1080/00137910108967561

[Accessed 11 Oct. 2017].

Kurt, D. (2017). Net Present Value - NPV. [online] Investopedia. Available at:

http://www.investopedia.com/terms/n/npv.asp [Accessed 11 Oct. 2017].

Available at: http://www.businessdictionary.com/definition/net-present-value-

NPV.html [Accessed 11 Oct. 2017].

- 216547270-Chap-009Uploaded bysucusucu3
- Lecture17-18Uploaded byEhsan Ur Rehman
- TVMPracticeProb.docxUploaded byShaikh Shahrukh Farhan
- simulation.pdfUploaded bysayed_20004
- Ef 5370 Lecture 1Uploaded bySeng Chan
- ValueUploaded byGustavo
- Business MathematicsUploaded byMirwais Rahimi
- Chapter 26 - AnswerUploaded bylou-924
- chapter05.pdfUploaded bythteng
- Financial AnalysisUploaded bybro
- FinancialUploaded bycrestag
- Chap014.pptUploaded byMark Gerald Jr Gabriel
- 16R-90Uploaded bysaverr
- Automation of Inventory Mgm-Synopsis (1)Uploaded byNageshwar singh
- Ch 3Uploaded byith
- GemstoneUploaded bymy_khan20027195
- Ileco 3 2016-001+RC_SIPCILECOIII.pdfUploaded bySamMoore
- Investment AppraisalUploaded byromeoamu87
- Kim Hotels is Interested in Developing a New Hotel in SeoulUploaded byAdi Susilo
- Acctg 22 - Chapter 10 Quiz 1Uploaded byJennifer Simone Tinagan
- Capital Budgeting DCFUploaded byNadya Rizkita
- Accounting for Decision Making Lecture 11 to 68Uploaded byM Kaderi Kibria
- Project Appraisal PptUploaded byguruchandran
- Captial BudgtingUploaded byManoj Kumar
- SPE_70027_02pllUploaded byJulo Desmazures
- Financial Risk AnalysisUploaded byPrashant Ujjawal
- Markathon_March2010Uploaded byDevspring
- Process Selection and Capacity Planning.pptUploaded bykeogh09
- Financial MathematicsUploaded bydheerajkbeu
- International Machine Corporation case analysis - International Financial ManagementUploaded byRavi Jain

- NPV_CleonUploaded byCleonSciaxe
- Assessment1 Cleon s3678324Uploaded byCleonSciaxe
- 2017 utorrent-trackers.txtUploaded byAlexRodrigo
- Pavement Design ExamplesUploaded byCleonSciaxe
- Sop Format (1)Uploaded byCleonSciaxe
- Railway infrastructure JAPANUploaded byCleonSciaxe
- Project reportUploaded bySuresh Vanamala
- IS 456-2000 Indian Standard code book for RCC design guidelinesUploaded bylokesh2325
- Different_Types_of_Words_and_Phrases.pdfUploaded byCleonSciaxe
- concrete design Example ProblemUploaded byatherton625
- Underground ConstructionUploaded byCleonSciaxe
- BridgeUploaded byCleonSciaxe

- OTA_E_Tra04Uploaded byGary Webster
- The Credit Rating Agencies Role of SECUploaded byNawsher21
- RA 8974 vs RA 10752Uploaded byLeandro Yap
- Cockerell v Title Ins Trust CoUploaded byMortgage Compliance Investigators
- An ARTICLE on Expectation Gap in Auditing ProfessionUploaded byShamim Raihan
- Land Bank of the PhilippinesUploaded byAdam Wood
- WF Rate SheetUploaded byTiffany Dacino
- The Impact of Intel in Costa Rica 10Uploaded byDimitris Argyriou
- a_55_7Uploaded byAKINYEMI ADISA KAMORU
- Bond MarketUploaded byEmad Rashid
- business in a global environment exerciseUploaded byAnonymous EPwKgElz5
- The Effect of Swiss Bank Secrecy on the Enforcement of Insider TrUploaded byShahid Jamal Tubrazy
- 08 ADAMS Signing Bills of LadingUploaded bycaptlakho6501
- Eisner v MacomberUploaded byDario G. Torres
- Banking Sector NepalUploaded bybishalbhattarai1987
- Sample Balance Sheet Concierge Service IndustryUploaded bykpsrikanthv
- GE_AR15Uploaded byAstri
- downloadUploaded byVilas Adkine
- Adscash PresentationUploaded byDevender Raju
- The Future of FinTech Paradigm Shift Small Business Finance Report 2015Uploaded byJibran
- Capital Account ConvertibilityUploaded byanirbank4b
- Doleh, Sufian Ch_10 P23 Build a ModelUploaded bysadoleh
- Greenlight Capital Q4 2013 LetterUploaded byCanadianValue
- Problem on Maturity GapUploaded byRoohani Wadhwa
- Why Study Islamic FinanceUploaded byMoyassar Eltigani
- Zakat Ch01Uploaded byKhalid
- Green Stone at Light WaterUploaded byRyan Sloan
- depression fill in notesUploaded byapi-286095153
- ABCUploaded byisaac
- 2013-27200aUploaded byMarketsWiki