Net Present Value - 1157 Words

There are six projects which â€Å"Cheltenham Races† LTD aims to undertake and for this purpose the company is using investment appraisal methods. Investment appraisal procedure is the technique of evaluation of different projects to choose the best projects which maximise the company’s profit. THE INVESTMENT DECISION MAKING PROCESS: There are number of stages to be followed in the investment decision making process. * Origination of proposals; It is very important at this stage that organisation’s have free friendly atmosphere for the staff/participants in decision making, as new ideas are expected to develop at this stage, thus rejecting some alternatives projects early. * Project screening; At this stage qualitative factors†¦show more content†¦In this method the following factors have much importance and that they affect the results of the NPV. Such factors are; a) Time value of money b) Inflation c) Depreciation d) Taxation / Written down allowance Time value of the money is based on the concept that the value of the money increases over time, e.g.  £1 earned or spent sooner is worth more than  £1 earned or spent later. There are many reasons for this rise in worth of present value of  £1 in the future. * Uncertainty The business world is considered full of risk and uncertainty. It is believed that in practise the business get promise of cash in future, it can never be certain until it is actually received. * Inflation Inflation is the decline in purchasing power of the monetary unit. It is a common sense that money’s worth changes over time due to inflation. If there is an element of inflation then it is necessary to adjust the values by the given rates for inflation. Inflation is not considered important in the decision making process when it is low but it is important to include the factor when it rises let say 10 %. Factors influencing Ranking NPV vs. PI If we take an approach of Net present value (NPV) and Profit index (PI) to rank these 6 projects without setting any constraints then the simple raking would be below showing projects in the following sequence. RANK | PROJECT | | INVESTMENT | NPV | PI | RANK | (NPV) | | |  £Show MoreRelatedNet Present Value1875 Words   |  8 Pagesyear and reported the following information. The company had current assets of $153,413, net fixed assets of $ 412,331, and other assets of $83,552. The firm also has current liabilities worth $65,314, long-term debt of $178,334, and common stock of $162,000. How much retained earnings does the firm have? a. $ 405,648 b. $243,648 c. $167,918 d. $573,566 6.) Tre-Bien Bakeries generated net income of $233,412 this year. At year end, the company had accounts receivables of $47,199Read MoreNet Present Value1958 Words   |  8 Pagestimes attributed to the nature of a project. Capital inv appraisal of new technologies: Problems, misconceptions and research directions * Specifically, it has been alleged that the traditional appraisal methods of payback, discounted net present value (NPV) and internal rate of return (IRR) undervalues the long-term benefits; that traditional financial appraisals assume a far too static view of future industrial activity, under-rating the effects and pace of technological change; that thereRead MoreNet Present Value/Present Value Index2559 Words   |  11 PagesNet Present Value/Present Value Index The management team at Savage Corporation is evaluating two alternative capital investment opportunities. The first alternative, modernizing the company’s current machinery, costs $45,000. Management estimates the modernization project will reduce annual net cash outflows by $12,500 per year for the next five years. The second alternative, purchasing a new machine, costs $56,500. The new machine is expected to have a five-year useful life and a $4,000Read MoreNet Present Value and Salvage Value1144 Words   |  5 Pages------------------------------------------------- FINC5001 Capital Market and Corporate Finance ------------------------------------------------- Workshop 5 – Capital Budgeting II 1. Basic Concepts Review a) In applying Net Present Value, what factors do we include, and what factors do we ignore? Use cash flows not accounting income Ignore * sunk costs * financing costs Include * opportunity costs * side effects * working capital * taxation * inflation Read MoreNet Present Value Essay603 Words   |  3 Pages1. Basic present value calculations Calculate the present value of the following cash flows, rounding to the nearest dollar: a. A single cash inflow of $12,000 in five years, discounted at a 12% rate of return. b. An annual receipt of $16,000 over the next 12 years, discounted at a 14% rate of return. c. A single receipt of $15,000 at the end of Year 1 followed by a single receipt of $10,000 at the end of Year 3. The company has a 10% rate of return. d. An annual receipt of $8,000 for threeRead MoreNotes On The Net Present Value1462 Words   |  6 PagesQuestion C [1] The Net Present Value [NPV] is the total sum of the present values of all the expected cash flows. For a project with a normal cash flows, this would mean that the NPV is the present value of expected cash flows minus the initial cost of the project. The formula is as such; NPV = -CF0 + CF1 (1+k)-1 + CF2 (1+k)-2 + †¦ + CFn (1+k)-n where; CF0 is the initial investment outlay, or cash outflow CFt is the after-taxed cash inflows at time t k is the required rate of return for the projectRead MoreNet Present Value and Project3264 Words   |  14 Pagesbe 13.487% and a Weighted Average Cost of Capital (WACC) to be at a value of 9.70%. Factoring in the WACC into our projections we found that if the demand maintains at an average rate the project will be at a positive Net Present Value of $5,997,505.31 with an IRR of 13.21%, a profitability index of 8.84, and an approximate payback period of 6.84 years. Please see Exhibits below for a snapshot of the capital budget and NPV values. This information seemed to be very promising for the project inRead MoreNet Present Value ( Npv )1530 Words   |  7 PagesNet present value (NPV) is a discounted cash flow technique used to determine the overall value of a project or a succession of cash flows (Blocher et al, 2008). See Appendix 1 for a simplified calculation. Belli (2001) argues that NPV is more suitably applied to mutually exclusive projects; these types of projects are those that if accepted, prevent other contending projects to be approved (Mowen et al, 2009). NPV is understood to be an absolute measure, therefore when selecting between mutuallyRead MoreNet Present Value and Question5593 Words   |  23 Pagesof capital. C) If you are unsure of your cost of capital estimate, it is important to determine how sensitive your analysis is to errors in this estimate. D) If the cost of capital estimate is more than the internal rate of return (IRR), the net present value (NPV) will be positive. Question 2 If it is feasible to undertake a project irrespective of the decision concerning the acceptance of another, the two projects are said to be: A) independent. B) dependent. C) mutually exclusive. D) none ofRead MoreNet Present Value and Business9074 Words   |  37 PagesPrinciples (GAAP). By using these concepts as the foundation, readers of financial statements and other accounting information do not need to make assumptions about what the numbers mean. For instance, the difference between reading that a truck has a value of $9000 on the balance sheet and understanding what that $9000 represents is huge. Can you turn around and sell the truck for $9000? If you had to buy the truck today, would you pay $9000? Or, perhaps the original purchase price of the truck was