Overall Net Present Essay

614 Words Oct 30th, 2011 3 Pages
Principles of Finance

Final Project

PowerCo

Instructor:

Date Submitted:

The purpose of the following analysis is to determine whether PowerCo, a medium sized power company in the southeast United States should build a new generator. It is the belief of PowerCo that demand for electricity will significantly increase over the next 10-12 years. In order to meet this demand, the investment in a new generator needs to be reviewed. PowerCo’s Treasury department has prepared financial projections to facilitate the analysis of the investment. This information will be used for the analysis in order to provide a recommendation of whether PowerCo should build or not build the new generator.

The Present Value of the expected
…show more content…
It is unclear as to how the estimated cash flows were determined and what factors were reviewed to create these estimates. There is definitely risk associated with the initial investment in terms of build time. It is completely plausible that it could take more than 2 years to complete construction of the generator which could also skew the overall Net Present Value. An additional risk to be considered would be the length of functionality of the generator. The Treasure department believes the generator could function for more than 10 years, and but based their projections on only 10 years, but what if the generator does not make it to the full 10 years? Changes to any of these risk factors would detrimentally change the calculation of the overall Net Present Value, possibly equating to a negative Net Present Value.

Based upon the above analysis alone, it would be my recommendation for PowerCo to build the new generator. The basis of this recommendation is due to the positive $89,000 overall Net Present Value which according to capital budgeting NPV acceptance or rejection criteria says to accept. Costs will not only be covered, but the value of the firm will increase, a positive for investors. It is my belief though that with such a low Net Present Value, PowerCo should review the overall plans for this investment to see if there is anything they can do to increase the Net Present Value to make it a

More about Overall Net Present Essay