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    NPV Total Present Value - Cash Out Flow /investment

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    Mafuzur Rahman
    Modern discounted cash flow methods include net present value (NPV) and internal rate of return (IRR). [NPV] calculates the present value of future cash flows and compares it to the initial investment, with a positive NPV indicating project acceptance. [Payback period] measures the time needed for cumulative cash flows to repay the initial investment. Shorter payback periods are preferred. The document provides examples of calculating NPV and payback period for projects with constant and variable cash flows to determine which projects should be accepted.

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    NPV Total Present Value - Cash Out Flow /investment

    Uploaded by

    Mafuzur Rahman
    24 views3 pages
    Modern discounted cash flow methods include net present value (NPV) and internal rate of return (IRR). [NPV] calculates the present value of future cash flows and compares it to the initial investment, with a positive NPV indicating project acceptance. [Payback period] measures the time needed for cumulative cash flows to repay the initial investment. Shorter payback periods are preferred. The document provides examples of calculating NPV and payback period for projects with constant and variable cash flows to determine which projects should be accepted.

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    NPV maths

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    Modern discounted cash flow methods include net present value (NPV) and internal rate of return (IRR). [NPV] calculates the present value of future cash flows and compares it to the initial investment, with a positive NPV indicating project acceptance. [Payback period] measures the time needed for cumulative cash flows to repay the initial investment. Shorter payback periods are preferred. The document provides examples of calculating NPV and payback period for projects with constant and variable cash flows to determine which projects should be accepted.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    24 views3 pages

    NPV Total Present Value - Cash Out Flow /investment

    Uploaded by

    Mafuzur Rahman
    Modern discounted cash flow methods include net present value (NPV) and internal rate of return (IRR). [NPV] calculates the present value of future cash flows and compares it to the initial investment, with a positive NPV indicating project acceptance. [Payback period] measures the time needed for cumulative cash flows to repay the initial investment. Shorter payback periods are preferred. The document provides examples of calculating NPV and payback period for projects with constant and variable cash flows to determine which projects should be accepted.

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    © All Rights Reserved
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    Download as docx, pdf, or txt
    of 3

    Modern/discounted cash flow methods

    1. Net present value (NPV)


    2. IRR (Internal rate of return)

    NPV:

    NPV recognizes the time value of money, if NPV is positive we will accept it and if NPV is negative , we
    will reject it, if we get positive NPV for both project , we will choose the highest positive value.

    Example:1

    A project cost 25000, and is expected to generate cash inflows are given as below:

    Year 1 2 3 4 5
    Cash inflows 10000 8000 9000 6000 7000
    PV factor 0.893 0.797 0.712 0.636 0.567
    @12%
    Calculate NPV of the project.

    Solution:

    Year Cash inflows PV factor @12% Present value


    1 10000 0.893 8930
    2 8000 0.797 6376
    3 9000 0.712 6408
    4 6000 0.636 3816
    5 7000 0.567 3969
    Total= 29,499

    NPV= Total present value - Cash out flow /investment


    = 29,499 – 25000

    = 44990

    Present value of NPV is positive, hence project is accepted.

    Example :2

    Calculate NPV & suggest which project should be accepted?

    Year 1 2 3 4 5 Investment
    Cash inflow A 35000 12000 4000 7000 9000 40,000
    Cash inflow B 18000 4000 25000 5000 12000 50,000
    PV factor @10% 0.909 0.826 0.751 0.683 0.621

    Solution:

    Year Cash in flows of A PV factor Present Value A Cash inflows of B Present Value
    @10% of B
    1 35000 0.909 31815 18000 16362
    2 12000 0.826 9912 4000 3304
    3 4000 0.751 3004 25000 18775
    4 7000 0.683 4781 5000 3415
    5 9000 0.62 5589 12000 7452
    Total= 55,101 Total= 49,308
    NPV for Project A= Total present value – Cash out flow= 55101-40000= 15,101 (Accepted)

    NPV for Project B= Total present value – Cash out flow= 49308 -50000 = -692 (rejected)

    So project A will be recommended as NPV is positive.

    Payback Period:
    1. Constant Inflow 2. Flexible inflow
    Example with constant inflow:
    A project require an initial investment of 20000 with a useful life of 5 years. The projected profit and loss
    discloses a profit after tax is 8000 every year. What is the payback period?
    Solution:

    Payback period method = Investment /Cash in flow= 20000/8000= 2.5 years (2 years and 6 month)

    Example with different cash inflow:


    A project require an initial investment of 20000 & generates the following cash inflows for 5
    years.

    Year 1 2 3 4 5
    Cash inflows 6000 8000 5000 4000 4000
    Calculate payback period of the project?
    Solution:

    Year Cash flows Cumulative cash flows


    1 6000 6000
    2 8000 14000
    3 5000 19000
    4 4000 23000
    5 4000 27000

    Payback period = 3 + 1000 /4000 = 3 + 0.25 = 3.25

    Suppose, project A has payback period 3 years and Project B has payback period 4 years , which
    one will be selected ?

    Ans : Project A (the lesser value is recommended)

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