Net present value (NPV) refers to the difference between the
value of cash now and the value of cash at a future
date.
Net present value in project
management is used to determine whether the
anticipated financial gains of a project will outweigh the
present-day investment — meaning the project is a worthwhile
undertaking.
Generally speaking, an investment with a positive NPV will be
profitable and therefore given a green light for consideration,
while an investment with a negative NPV will result in a financial
loss, and may not be undertaken.
Example
To understand how to calculate NPV, first consider the
following: Money is worth more now than it is later. So, for
example, $1,000 today is worth more than $1,000 in three years.
Why? Because you could take that $1,000 today and invest it,
earning a modest 4 percent each year. In three years, that $1,000
will be worth $1,124.86. (Note that this does not factor in
inflation, which we’ll address momentarily). That means the
“present value” of $1,000 after three years of investment is
$1,124.86.
An NPV profile plots a project's NPV at various costs of capital. A project's NPV profile is shown as follows. Identify the range of costs of capital that a firm would use to accept and reject this project. The point at which the NPV profile intersects the horizontal axis represents the _______ .
A project's NPV profile graph intersects the Y-axis at 0% cost
of capital and intersects the X-axis at the project's -( payback,
MIRR, IRR ?)(where NPV = 0). The Y-axis intersection point
represents the project's undiscounted NPV. The point at which 2
projects' profiles cross one another is the crossover rate. The
crossover rate can be found by calculating the--------? of the
differences in the projects' cash flows (Project Delta). A _______?
NPV profile indicates that increases in the cost...
Q1. A project's base case or most likely NPV is
$44,000, and assume its probability of occurrence is 50%. Assume
the best case scenario NPV is 85% higher than the base case and
assume the worst scenario NPV is 35% lower than the base case. Both
the best case scenario and the worst case scenario have a 25%
probability of occurrence. Find the project's coefficient of
variation.
Q2. Rick Kish has a $140,000 stock portfolio.
$50,000 is invested in a...
A project's base case or most likely NPV is $44,000, and assume
its probability of occurrence is 50%. Assume the best case scenario
NPV is 65% higher than the base case and assume the worst scenario
NPV is 35% lower than the base case. Both the best case scenario
and the worst case scenario have a 25% probability of occurrence.
Find the project's coefficient of variation. Enter your
answer rounded to two decimal places. For example, if your answer
is...
In what types of situations would capital budgeting decisions be made solely on the basis of project's net present value (NPV)? Identify potential reasons that might drive higher NPV for a given project. Substantiate your response by providing an example to explain your thought process.
If a project's net present value (NPV) is positive, its internal
rate of return (IRR) must be ______ the firm's required rate of
return (r)
a. less than
b. greater than
c. equal to
Other factors being constant, NPV of an international project is__ related to consumer demand and __ related to
the project's salvage value.a.positively; positivelyb.positively; negativelyc.negatively; positivelyd.negatively; negatively
A project has an initial cost of $58,425, expected net cash inflows of $10,000 per year for 10 years, and a cost of capital of 10%. What is the project's NPV? (Hint: Begin by constructing a time line.) Do not round your intermediate calculations. Round your answer to the nearest cent.
A project has the following cash flows:
Year
0
1
2
3
4
Cash flow
($240,000)
$60,000
$100,000
$60,000
$80,000
The project's payback period is:
a.
four years
b.
three and one-half years
c.
three and one-quarter years
d.
none of the above