Erpv Analysis Paper

10. What is the net present value (NPV) of a long-term investment project? Describe how managers use NPVs when evaluating capital budget proposals.

3. Estimate the project’s NPV. Would you recommend that Tucker Hansson proceed with the investment?

Barring further analysis, the positive NPV indicates HPL should accept the proposal and proceed with expansion, as it would add value to the company. However, it should be noted that the NPV only becomes positive in year 10 (it is negative in all previous years). Thus, if HPL fails to extend the initial three-year contract with its largest retail customer and the project does not endure the estimated 10-year lifespan, it could in fact produce a loss in value for the company.

Financial risks include the short payback period. A 3-year payback period would not allow Hansson the opportunity to breakeven. With a negative NPV in the first 3 years Hansson’s decision to invest in the project would be based on his ability to negotiate a longer contract time. The Net Present Value (NPV) would have to be examined in tandem with the other non-financial variables.

Kd (Wd), Ke (We) and Kp (Wp) are the costs (weights) associated, respectively, with the firm’s interest bearing debt,

later in the project life. With a NPV of less than -$810,000, Scenario 6 is the project with the

This analysis is done assuming the benefits accrued in the year 2050. The costs are evaluated from the year 2011 – the proposed time of starting the project, while the benefits are calculated from the year 2020 – the expected time of launching the project. The estimated streams of benefits and costs occurring each year between 2011 and 2050 were discounted to their present value and summarized to calculate the benefit cost ratio.

(d) For a given D/S, the WACC is greater than the WACC under MM's original (with tax) assumptions.

NPV helps us to find out either the cost of capital we invest in a project for long term is feasible or not.

where CFt is the cash flow at time t, k is the appropriate discount rate. Our project can be acceptable if the NPV is greater than or equal to zero and unacceptable otherwise. An NPV profile that shows the NPV for various discount rates will show how sensitive the project's NPV is to the discount rate assumption. Taking into account our Project's key financial data, we can compute the NPV as follows:

Input WACC of 10% for now. ***************************** We will calculate wacc shortly. SAMPLE PAGES FROM TUTORIAL GUIDE For illustrative Purposes Only *****************************

One of the two major component of WACC is the cost of equity. The cost of equity model takes into account three values which we must calculate - a risk-free rate (rf), risk premium rate (expected market return - rf), and Beta Value.

Since the first 4 periods are different we get the PV of each one alone, then as of the 4th year we get the perpetuity of the rest, and sum them up to get the final NPV

Problem is a simple NPV calculation that combines common sense with its practical implications. The first questions asked for the NPV of a series of cash flows with a discount rate of zero percent. In this instance, investors are not assuming any risk associated with lending the money over the three year period. As such, the NPV will be position as the cash flows are not being discounted. This situation, although rare, is prevailing in our current market economy with interest rates near 0%. The calculation itself was relative easy as the present value of a series or cash flows with a 0% discount rate is simply the value of the cash flows altogether. Therefore, the NPV is simply all the cash flows from the investment added up (Khan, 1993).

(d) Determine the NPV for each of these projects? Should they be accepted? Explain why? 1. Net Present Value (NPV) for project A @ 12%; Years 1 2 3 4 Net Cash flow (NCF) £000 20 30 40 50 Cost of Capital @ 12% 0.893 0.797 0.712 0.636 Present Value £000 17.86 23.91 28.48 31.8 2