Question

Discuss the following statement and give an example if possible “The EPS of a firm can go down even if the firm takes on a positive-NPV project”.

Answer 1

Yes, It is possible for a firm to have a positive-NPV project and downward going EPS.

Net Present Value (NPV) of a project is derived by bring all cash flows in its present value where as Earning per share (EPS) is the post tax Net Income distributed to shareholders which arrive after meeting all expenses, depreciation etc. of business.

Positive NPV means the company have more liquid assets whereas negative EPS can mean that company have more illiquid assets.

Suppose a company invest in a project which generate positive NPV but that company is showing lower EPS then before. It might be possible in following cases,

1. When a company have more than one project running

2. When a company have Accrued Expenses of previous years which is paid in present year.

3. When Company have done more pre-paid expenses in present year related with future years.

When Net income is dividend by no. of shares then EPS arrives. Net income comes after deducting all costs of doing business which is excluded in NPV.