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  • NPV Slides PDF

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    Utkarsh Kumar
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    The document discusses payback period and net present value (NPV) as methods to evaluate a potential project with an initial cost of $700,000 and expected annual returns of $200,000 over 4 years. The payback period is calculated to be 3.5 years, but using NPV with a 15% discount rate results in a negative value of -$129,004, indicating the project should not be undertaken based on NPV.

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    The document discusses payback period and net present value (NPV) as methods to evaluate a potential project with an initial cost of $700,000 and expected annual returns of $200,000 over 4 years. The payback period is calculated to be 3.5 years, but using NPV with a 15% discount rate results in a negative value of -$129,004, indicating the project should not be undertaken based on NPV.

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    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
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    10 views3 pages

    NPV Slides PDF

    Uploaded by

    Utkarsh Kumar
    The document discusses payback period and net present value (NPV) as methods to evaluate a potential project with an initial cost of $700,000 and expected annual returns of $200,000 over 4 years. The payback period is calculated to be 3.5 years, but using NPV with a 15% discount rate results in a negative value of -$129,004, indicating the project should not be undertaken based on NPV.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Flag for inappropriate content
    of 3

    Payback Period Example

    Expected project costs are $700,000

    Expected returns are $200,000 per year

    Payback period = 700,000 ÷ 200,000 = 3.5 years

    Revenues would cover investment costs in 3.5 yrs.


    Totals
    are
    equal,
    but
    NPVs
    are
    not

    2
    NPV or Discounted Cash Flow Based Selection

    Initial cost = $700,000; 4-year annual cash flow = $200,000;


    required rate of return = 15%
    NPV = -700,000 + 200,000/(1.15)1
    + 200,000/(1.15)2 + 200,000/(1.15)3
    + 200,000/(1.15)4
    NPV = -700,000 + 173,913 + 151,229 + 131,503
    + 114,351
    NPV = $-129,004

    Should they do this project?

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