Scribd
Upload
289 views2 pages

Written Assignment Unit 2 Fin MGT

The document presents the net present value (NPV) calculations for a 7-year project based on cash inflows estimated by the partner and the author. The NPV is negative (-$1,439) based on the partner's estimates, indicating the project is not financially viable. However, the NPV is positive ($9,471) based on the author's estimates, showing the project should be accepted. The author should convince the partner that a positive NPV means the project will earn more than alternative investments and is worth accepting, while a negative NPV means the project will lose money and should be rejected.

Uploaded by

Salifu J Turay
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
289 views2 pages

Written Assignment Unit 2 Fin MGT

The document presents the net present value (NPV) calculations for a 7-year project based on cash inflows estimated by the partner and the author. The NPV is negative (-$1,439) based on the partner's estimates, indicating the project is not financially viable. However, the NPV is positive ($9,471) based on the author's estimates, showing the project should be accepted. The author should convince the partner that a positive NPV means the project will earn more than alternative investments and is worth accepting, while a negative NPV means the project will lose money and should be rejected.

Uploaded by

Salifu J Turay
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
You are on page 1/ 2

Data

Cost of equipment = $80,000


Time of the project = 7 years
Discount factor = 7%
Scrap value of the equipment at the end of the year 7 = $5,000
Estimated cash inflow:
Partner = $14,000 annually
You = $14,000 yr 1,
$16,000 yr 2 – 4
$17,000 yr5 – 7

Calculation of Net Present Value for Partner


Year Cash flow ($) Discount factor at Present value($)
7%
0 (80,000) 1.00 (80,000)
1 14,000 0.935 13,090
2 14,000 0.873 12,222
3 14,000 0.816 11,424
4 14,000 0.763 10,682
5 14,000 0.713 9,982
6 14,000 0.666 9,324
7 (14,000 + 5000) = 19,000 0.623 11,837
Net Present Value (1439)

Calculation of NPV based on your estimates


Year Cash flow ($) Discount factor at Present value($)
7%
0 (80,000) 1.00 (80,000)
1 14,000 0.935 13,090
2 16,000 0.873 13968
3 16,000 0.816 13,656
4 16,000 0.763 12,208
5 17,000 0.713 12,121
6 17,000 0.666 11,322
7 (17,000 + 5000) = 22,000 0.623 13,706
Net Present Value 9471

Note:
Based on my partner’s estimated cash inflow of the project, the NPV of the project is not
financially viable and should not be accepted on the other hand, if the project is being cash
inflow based on your estimates, the NPV of the project is financially viable and should be
accepted.

The net present value is very essential in the determination of project acceptance and denial.
It dictates that investment project can only be accepted when the value of the NPV is positive
and must be rejected when the NPV is negative. For a project to be profitable the value of the
NPV must be positive.

Convince your partner with these points:


 The purpose of net present value is to help analyst and managers to decide whether or
not a new project is financially viable. Essentially, net present value measures the
total amount gain or loss a project will produce compared to the amount that could be
earned simply by saving the money in a bank or investing it in some other opportunity
that generates a return equal to the discount rate. If a long – term project has a positive
net present value, then it is expected to produce more income than what could be
gained by earning discount rate which means the company should accept the project.
 If the project has a net present value of zero it indicates that the organization breaks
even (i.e. it neither makes any gain or loss by pursuing the project). When the net
present value is negative i.e. less than zero, it indicates that the project should be
avoid or rejected.

You might also like