1421 Words6 Pages

Part I:
The formula for net present value is as follows:
INCLUDEPICTURE "http://i.investopedia.com/inv/dictionary/terms/NPV.gif" * MERGEFORMATINET
Â Source: Investopedia (2012)
The net present value of this project if T-Mobile's discount rate is 4% is therefore as follows:
Year
0
1
2
3
4
5
CF
-3219000
350000
939000
1122000
500000
400000
PV
-3219000
336538.5
868158.3
997453.9
427402.1
328770.8
NPV
-260676
d
4%
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.
The idea of net present value is that a dollar in the future is not worth the same as a dollar today. This idea is called the time value of money. Inflation, for example, diminishes the value of money over time, so future money is worth less than present-day money. The discount rate is not the rate of inflation, however, but the firm's cost of capital. This roughly means the cost that the firm must pay to its equity and debt holders in exchange for the right to use that capital. Any project that the firm undertakes must be more valuable than the cost of the capital used to undertake the project. Thus, the discount rate is set at the firm's cost of capital. For T-Mobile in this case, that rate is 4%. The reason the company only should invest in projects that offer a

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