Financial Management: The NPV Concept

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Part 1 The Project's NPV The PV of CF in this case will be given by; PV of CF = CF1 / (1+r)1 + CF2 / (1+r)2 + CF3 / (1+r)3 + CF4 / (1+r)4 + CF5 / (1+r)5 = $350,000/ (1+0.06)1 + $1,700,000/ (1+0.06)2 + $2,000,000/ (1+0.06)3 + $500,000/ (1+0.06)4 + $3,000,000/ (1+0.06)5 = $330,188.68 + $801, 886.79 + $628,930.82 + $117,924.53 + $566,037.74 = $2,444,968.56 Given the present value of cash inflow above, the project's NPV will be given by; NPV = Total PV of CF Initial cash outflow = $2,444,968.56 $4,000,000 = -$1,555,031.44 Recommendations Based on my Analysis According to the findings above, the project has a negative NPV. In such a case, I would advise the shareholders and executives of T-Mobile Corporation to reject the project. Rejecting the project would be advisable as in this case, the cash flows would also be negative given the negative NPV. The NPV Concept and its Meaning 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. Part 2 With the rumor of a likely merger between T-mobile and Sprint, it would be prudent to develop arguments for and against such an
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