Question
In: Finance
Can the net present value method of evaluating projects always identify the ones that will maximize...
Can the net present value method of evaluating projects always identify the ones that will maximize wealth? Why?
Solutions
Expert Solution
No, net present value (NPV) method is the method of evaluating projects or investments and not always identify the ones that will maximise wealth.
It provides better decision than than other methods making capital investments. It uses net present value of the investment project as base to accept or reject the proposal. Net present value method is difference between present value of cash inflows & present value of cash outflows that occurres the result of undertaking an investment project. It may be positive, negative or zero.
i) Positive NPV : It present value of cash inflow is greater than present value of cash outflow, NPV is said to be positive & project is to be accepted.
This will maximise the shareholder's wealth.
ii) Negative NPV : If presnet value of cash inflow is lower than present value of cash outflow, NPV is said to be negative & project is to be rejected. This will decrease the shareholder's wealth.
iii) Zero NPV : If present value of cash inflow is equal to present value of cash outflow, NPV is said to be zero & project is to be accepted. This will not impact shareholder's wealth.
jeff jeffy answered 1 year agoRelated Solutions
1. Net present value (NPV) Evaluating cash flows with the NPV method The net present value...
1. Net present value (NPV)
Evaluating cash flows with the NPV method
The net present value (NPV) rule is considered one of the most
common and preferred criteria that generally lead to good
investment decisions.
Consider this case:
Suppose Cold Goose Metal Works Inc. is evaluating a proposed
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initial investment of $450,000. The project is expected to generate
the following net cash flows:
Year
Cash Flow
Year 1
$325,000
Year 2...
1. Net present value (NPV) Evaluating cash flows with the NPV method The net present value...
1. Net present value (NPV)
Evaluating cash flows with the NPV method
The net present value (NPV) rule is considered one of the most
common and preferred criteria that generally lead to good
investment decisions.
Consider this case:
Suppose Happy Dog Soap Company is evaluating a proposed capital
budgeting project (project Beta) that will require an initial
investment of $3,000,000. The project is expected to generate the
following net cash flows:
Year
Cash Flow
Year 1
$300,000
Year 2
$475,000...
First United Bank Inc. is evaluating three capital investment projects using the net present value method....
First United Bank Inc. is evaluating three capital investment
projects using the net present value method. Relevant data related
to the projects are summarized as follows:
Branch
Office
Expansion
Computer
System
Upgrade
ATM
Kiosk
Expansion
Amount to be invested
$750,769
$459,475
$219,567
Annual net cash flows:
Year 1
287,000
198,000
123,000
Year 2
267,000
178,000
85,000
Year 3
244,000
158,000
62,000
Present Value of $1 at Compound
Interest
Year
6%
10%
12%
15%
20%
1
0.943
0.909
0.893
0.870
0.833...
First United Bank Inc. is evaluating three capital investment projects using the net present value method....
First United Bank Inc. is evaluating three capital investment
projects using the net present value method. Relevant data related
to the projects are summarized as follows: Branch Office Expansion
Computer System Upgrade ATM Kiosk Expansion Amount to be invested
$499,605 $352,940 $157,156 Annual net cash flows: Year 1 261,000
191,000 112,000 Year 2 243,000 172,000 77,000 Year 3 222,000
153,000 56,000 Present Value of $1 at Compound Interest Year 6% 10%
12% 15% 20% 1 0.943 0.909 0.893 0.870 0.833...
What are the advantages of evaluating projects using the net present value and internal rate of...
What are the advantages of evaluating projects using the net
present value and internal rate of return methods instead of the
payback and accounting rate of return methods?
Net Present Value Method, Present Value Index, and Analysis First United Bank Inc. is evaluating three...
Net Present Value Method, Present Value Index, and Analysis
First United Bank Inc. is evaluating three capital investment
projects using the net present value method. Relevant data related
to the projects are summarized as follows:
Branch
Office
Expansion
Computer
System
Upgrade
ATM
Kiosk
Expansion
Amount to be invested
$601,461
$411,359
$216,033
Annual net cash flows:
Year 1
317,000
219,000
133,000
Year 2
295,000
197,000
92,000
Year 3
269,000
175,000
67,000
Present Value of $1 at Compound
Interest
Year
6%
10%...
What are the payback and NPV (net present value) methods of evaluating capital projects? Which is...
What are the payback and NPV (net present value) methods of
evaluating capital projects? Which is considered the best
evaluation method, and why is one better than the other?
Net Present Value Method The following data are accumulated by Paxton Company in evaluating the purchase...
Net Present Value Method
The following data are accumulated by Paxton Company in
evaluating the purchase of $128,700 of equipment, having a
four-year useful life:
Net Income
Net Cash Flow
Year 1
$36,000
$61,000
Year 2
22,000
47,000
Year 3
11,000
35,000
Year 4
(1,000)
24,000
Present Value of $1 at Compound
Interest
Year
6%
10%
12%
15%
20%
1
0.943
0.909
0.893
0.870
0.833
2
0.890
0.826
0.797
0.756
0.694
3
0.840
0.751
0.712
0.658
0.579
4
0.792
0.683...
Net Present Value Method The following data are accumulated by Paxton Company in evaluating the purchase...
Net Present Value
Method
The following data are
accumulated by Paxton Company in evaluating the purchase of $98,100
of equipment, having a four-year useful life:
Net Income
Net Cash Flow
Year 1
$31,000
$53,000
Year 2
19,000
41,000
Year 3
9,000
31,000
Year 4
(1,000)
21,000
Present Value of $1 at Compound
Interest
Year
6%
10%
12%
15%
20%
1
0.943
0.909
0.893
0.870
0.833
2
0.890
0.826
0.797
0.756
0.694
3
0.840
0.751
0.712
0.658
0.579
4
0.792
0.683...
Net Present Value Method The following data are accumulated by Geddes Company in evaluating the purchase...
Net Present Value Method
The following data are accumulated by Geddes Company in
evaluating the purchase of $153,200 of equipment, having a
four-year useful life:
Net Income
Net Cash Flow
Year 1
$44,000
$75,000
Year 2
27,000
58,000
Year 3
13,000
44,000
Year 4
(1,000)
29,000
Present Value of $1 at Compound
Interest
Year
6%
10%
12%
15%
20%
1
0.943
0.909
0.893
0.870
0.833
2
0.890
0.826
0.797
0.756
0.694
3
0.840
0.751
0.712
0.658
0.579
4
0.792
0.683...
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