1.14 NPV Solutions (21/92) -- Corporate Finance

1.14 NPV Solutions Example #1: | Year | Cash Flow | PVF | PVCF | | 0 | ($2,500) | 1.0000 | ($2,500) | | 1 | 250 | .9259 | 231.48 | | 2 | 500 | .8573 | 428.65 | | 3 | 1,000 | .7938 | 793.80 | | 4 | 1,500 | .7350 | 1,102.50 | | 5 | 2,000 | .6806 | 1,361.20 | | NPV= | 1,417.63 | Example #2: | Year | Cash Flow | PVF | PVCF | | 0 | ($2,500) | 1.0000 | ($2,500) | | 1 | 2,000 | .9259 | 1,851.80 | | 2 | 1,500 | .8573 | 1,285.95 | | 3 | 1,000 | .7938 | 793.80 | | 4 | 500 | .7350 | 367.50 | | 5 | 250 | .6806 | 170.15 | | NPV = | 1,969.20 | Note: that the timing of the cash flows is included in the NPV model. The decision rule for NPV is to: - Accept any independent, non-competing project with a positive NPV. The NPV is a useful measure as it tells management by how much it may expect the project to increase the firm’s wealth on a present value basis. - Accept that project – among mutually exclusive alternatives – whose NPV is greatest, assuming it is positive. He who knows only his own side of the case knows little of that. –John Stuart Mill