Finance Quiz Answers

NPV analysis uses future cash flows to estimate the value that a project could add to a firm’s shareholders. A company director or shareholders can be clearly provided the present value of a long-term project by this approach. By estimating a project’s NPV, we can see whether the project is profitable. Despite NPV analysis is only based on financial aspects and it ignore non-financial information such as brand loyalty, brand goodwill and other intangible assets, NPV analysis is still the most popular way evaluate a project by companies.

ii. The project should be accepted if the NPV is positive because such a project increases shareholder value.

Yes. This project should be accepted because the NPV ≥ 0. and the IRR ≥ required rate of return.

7) See Table 1 NPV=42,318.71 IRR = 14% MIRR = 12% Payback period= 2.93 years. Yes the project should be undertaken.

Step Three: Draw out a timeline, and then take the present value of all cash flows

Due to the NPV being a positive number listed in the above calculations it is my belief and will be the advantage of the company in question to go ahead with the project and expect a great return for their efforts. Cash flow is one of the most important facets of an organization. Net present value also known as (NPV) can be calculated before or after taxes ( CCIM Institute, 2007).

Based on this calculation, the project should not be accepted. In general, a project should not be accepted if the net present value is below zero. The net present value of this project is -$260,676, so it should not be accepted.

e) Should your company proceed with this project? Explain based on the decision criteria for NPV, PI, and IRR.

e. A decrease in the projects initial cost will cause the project to have a negative NPV

When considering potential investments it is important to know the present value of the investment so the firm knows how much to invest in order to reach a predetermined profit. The first investment opportunity involves an eight point five percent return rate over six years with a predetermined payout of twenty four thousand dollars. The initial investment amount must be determined. In order to do so, the present value will need to be calculated. This is done by using the present value equation, future value/ (1+R)^n. When calculated the company should initially invest fourteen thousand seven hundred and eleven dollars. This initial investment predicts a return on investment of twenty four thousand

Net Present Value (NPV) calculates the sum of discounted future cash flows and subtracting that amount with the initial investment of the project. If the NPV of a project results in a positive number, the project should be undertaken. It is the most widely used method of capital budgeting. While discount rate used in NPV is typically the organization’s WACC, higher risk projects would not be factored in into the calculation. In this case, higher discount rate should be used. An example of this is when the project to be undertaken happens to be an international project where the country risk is high. Therefore, NPV is usually used to determine if a project will add value to the company. Another disadvantage of NPV method is that it is fairly complex compared to the other methods discussed earlier.

Net Present Value (NPV) is the standard method for the financial appraiser of long-term projects. Measuring the excess or shortfalls of cash flows is to measure the difference of the invested and market cost. This method is a good investment, if of course, it brings money to the company, after the discounted rate is calculated. The discounted rate is the project’s Cost of Capital. If the present cash flows and future cash flows are done correctly, this will give the company the New Present Value. Thus, the projects should be accepted only if the plus is on the calculations of Net Present Value NPV > 0 measurements of time, profitability, value to the organization value to the shareholders.

if we are dealing with many investments, we accept the one with the highest NPV.

The NPV according to Brigham and Ehrhardt (2010), is simply "the present value of a project's cash inflows minus the present value of its costs." Therefore, NPV is used to determine the contribution a given project makes to shareholder wealth. Thus a higher NPV benefits both the shareholders and the stock price. As Brigham and Ehrhardt (2010) note, a project with a positive NPV should be accepted as such a project enhances shareholder value.

Mutually exclusive projects are another situation for which NPV must extend its approach. In such projects, the chosen project is usually one which results in the greatest positive NPV because this will produce the greatest addition to shareholders’ wealth. In the case of mutually exclusive investments, ranking becomes crucial as only