Module 2 - Case Present Value

Module 2 - Case Present Value

Part I:

The NPV also known Net Present Value, whose acronym is NPV, is a procedure to calculate the present value of a number of future cash flows, caused by an investment. The methodology is to discount the present time (i.e. update through rate) all cash flows of the project future. This value is subtracted from the initial investment, so that they obtained value is the net present value of the project (Beasley2005).

The present value method is one of the most widely used economic criteria in evaluating investment projects. Is to determine the equivalence at time 0 of the future cash flows generated by a project and compare this equivalence to the initial outlay. When this equivalence is greater than the initial outlay, then it is recommended that the project is accepted.

A company usually compares different alternatives for checking whether or not to draft him. Normally the alternative with the highest NPV is usually the best for the party, but does not always have to be that way. There are times when a company chooses a project with a lower NPV due to various reasons such as may be the image that you bring to the company, whether for strategic or other reasons then that entity interested (Clark 2008).

Question A

Present Value at 7%

$ 15,000 / 1.07 = $ 14,018.69

Present Value at 4%

$ 15,000 / 1.07 = $ 14,423.08

Question B

Account A

$ 6,500.00 / 1.06 = $ 6,132.08

Account B

$ 12,600.00 / 1.062 = $ 11,886.79

Question C

Here is how much income this gold mine is projected to bring you each year for the next three years.

Year 1: $ 49,000,000

Year 2: $ 61,000,000

Year 3: $ 85,000,000

Computation of Present Value on 7%

At 7% discount rate

$ 49,000,000 / (1.07) + $ 61,000,000 / ...