490 Words2 Pages

Introduction The purpose of this analysis is to make a determination about a project that the PowerCo is considering. The project runs for twelve years. The discount rate is 8%. There are costs for the first two years and then there are net positive cash flows for the subsequent ten years. A net present value calculation will be used in order to determine if the company should undertake this project or not. The present value calculations will be done according to this formula:
INCLUDEPICTURE "http://i.investopedia.com/inv/dictionary/terms/NPV.gif" * MERGEFORMATINET
Source: Investopedia (2012)
The present value of the costs is as follows:
Year
1
2
Cash Flow
-25
-28
PV
-23.1481
-24.0055
So therefore the total PV of the costs is $47.15.
The total after-tax PV of the revenues is $47.24, using the same formula.
The total NPV for the project, therefore, is $.08 million, or $80,000, based on the formula of $47.24-$47.15 (with rounding). The full calculation is shown in Appendix A.
Approving the project is fraught with risk. Although it has a positive NPV, it is only positive by the slimmest of margins. This means that any change for the negative in any of the assumptions and the project would have a negative NPV. Normally, this type of project would need to be subjected to a rigorous sensitivity analysis before it is approved. All of the calculations are based on assumptions, and if any of those assumptions is poorly-conceived, the project would have a

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