Net Present Value and Materials Price Variance

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.

2. Net Present Value – Secondly, Peter needs to investigate the Net Present Value (NPV) of each project scenario, i.e. job type, gross margin, and # new diamonds drills purchased. The NPV will measure the variance of the present value of cash outflow (drilling equipment investment) versus the future value of cash inflows (future profits), at the benchmark hurdle rate of 20%. A positive NPV associated with the investment means that the investment should be undertaken as it exceeds the minimum rate of return. A higher NPV determines which project scenario will have the highest return on cash flow, hence determining the most profitable investment in terms of present money value.

Evaluating the risks, calculating the probability of success, and factoring in the projected profit from sales will provide a clearer NPV to be compared with other projects in the

32) Compute the NPV for the following project. The initial cost is $5,000. The net cash flows are $1,900 for four years. The net salvage value is $1,000 when the project terminates. The cost of capital is 10%.

Net present value (NPV) is the present value (PV) of an investment’s future cash flows minus the initial investment (“Net Present Value,” 2011).   The high-tech alternative has a PV of $13,940,554.49 with an initial investment of $7,000,000, so the NPV = $6,940,554.49.   This positive NPV indicates to

I am asked to compute the before-tax Net Present Value or NPV of a new ski lift for Deer Valley Lodge and advise the management there of the profitability. Before I am able to make this calculation there are a few calculations that I will need to make first. First the total amount of the investment, this will be the cost of a lift itself $2 million plus the cost of preparing the slope and installing the lift $1.3 million. Thus the investment amount for one lift is $3.3 million.

Actual materials price $128 per ton Actual quantity of materials purchased and used 1,250 tons

2) Will we also assume the length and proposed annual benefits for the following years in the NPV analysis?

Account for time. Time is money. We prefer to receive cash sooner rather than later. Use net present value as a technique to summarize the quantitative attractiveness of the project. Quite simply, NPV can be interpreted as the amount by which the market

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.

The prices of materials show an increase of 1.48 % on average from budgeted. In particular metal tubing and padding show a price variance of 0.31 and 0.32 respectively, costing $ 0.67 in excess per chair overall.

In the case of Worldwide Paper Company we performed calculations to decide whether they should accept a new project or not. We calculated their net income and their cash flows for this project (See Table 1.6 and 1.5). We computed WPC’s weighted average cost of capital as 9.87%. We then used the cash flows to calculate the company’s NPV. We first calculated the NPV by using the 15% discount rate; by using that number we calculated a negative NPV of $2,162,760. We determined that the discount rate of 15% was out dated and insufficient. To calculate a more accurate NPV for the project, we decided to use the rate of 9.87% that we computed. Using this number we got the NPV of $577,069. With the NPV of $577,069 our conclusion is to accept this

1. The net present value is the projects present value of inflows minus its cost. It shows us how much the project contributes to the shareholders wealth. The NPV of each franchise are:

This analysis will determine whether or not the project is worth pursuing using a net present value (NPV) approach.

The Net Present Value is one of the techniques that are used by firms when evaluating which investment proposals to take on board and which ones to reject. The net present value is calculated by discounting all flows to the present and subtracting the present value of all inflows.