Question
In: Operations Management
N) Consider investing on at least two new technologies with different initial investments and future cash...
N) Consider investing on at least two new technologies with different initial investments and future cash flows. Assuming a discount rate (interest rate) , calculate the NPV (net present value) for each technology to choose the best one.
Solutions
Expert Solution
Q: Consider investing in at least two new technologies with different initial investments and future cash flows. Assuming a discount rate (interest rate),
calculate the NPV (net present value) for each technology to choose the best one.
Solution: Before Calute NPV, we should understand the concept of NPV(Net Present Value)
Net present Value (NPV)
Net Present value is the discounting cash flow technique of capital Budgeting, it is the difference between the present value of the future value of cash flow with the initial cash flow of the project.
NPV= Present Value of Future Cash Flow- Initial outlay of Project
Present Value of Future Cash Flow=
CF1: Cash Flow of the First year, CF2: Cash Flow of the Second year and CFn: Cash flow for n year etc.
r= Interest Rate
n= Number of year
Important Element of NPV
- Cost of Project(Like Machinery)
- Future Cash flow of Project
- Discounting Rate
Calculation of NPV for Two New Technology: To choose the best One
| Basis | Investment-1 | Investment-2 |
| Name | Technology-A | Technology-B |
| Discount Rate(Interest Rate) | $10,000 | $15,000 |
| Life | 3 years | 3 years |
| Future Cash Flow- Ist Year | $5,000 | $3,000 |
| Future Cash Flow- 2nd Year | $6,000 | $5,000 |
| Future Cash Flow- 3rd Year | $7,000 | $8,000 |
Calculation of Present Value as per Formulae.
| Technology -A Future Cash Flow | |||
| Year No. | Future Value | Interest Rate | Present value |
| 1 | $5,000 | 10% | $4,550 |
| 2 | $6,000 | 10% | $4,980 |
| 3 | $4,000 | 10% | $3,000 |
| Total Present Value of First Investment | $12,530 |
NPV of Technology A= Present Value of Future Cash Flow- Initial outlay of Project
= $12,530 - $10,000
= $2,530(Positive NPV)
| Tecnology -B Future Cash Flow | |||
| Year No. | Future Value | Interest Rate | Present value |
| 1 | $3,000 | 10% | $2,730 |
| 2 | $5,000 | 10% | $4,150 |
| 3 | $8,000 | 10% | $6,000 |
| Total Present Value of First Investment | $12,880 |
NPV of Technology B= Present Value of Future Cash Flow- Initial outlay of Project
= $12,880 - $15,000
= $2,120(Negative NPV)
Decision
After analyzing both NPV of both technology, we understand that Technology A is giving us positive NPV as compare with Technology-B and its the best option for Investment.
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keosha answered 5 months agoRelated Solutions
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Q 2
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Year
Investment A
Investment B
0
-$100
-$100
1
58
31
2
73
58
3
87
180
Question options:
1-
Project A 1.58 years; Project B 2.53 years
2-
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Consider two investments with the following cash flows:
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0
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19,000
29,000
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27,000
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15,000
25,000
4
12,000
22,000
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22,000
32,000
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100,000
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2000
11000
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6000
10000
3
10000
10000
4
24000
8000
5
26000
5000
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