PRESENT VALUE

Present Value

Present Value

Net Present Value

Within the broad category of finance, there are many tools and techniques available for use by competitive intelligence (CI) professionals to analyze the general financial health of a company and its competitors. Whether your firm or your client might be considering such things as mergers & acquisitions (M&A) analysis or project valuation, net present value (NPV) analysis is a very simple tool that can be used with great benefits.

What is the appropriate discount rate?

The choice of discount rate to use in your NPV analysis can have serious impact on results and there are several different ways to arrive at an appropriate discount rate. As a general rule, you should use a discount rate that matches the way in which your firm is financed. If a firm were entirely financed with equity, the most appropriate discount rate to use would be the required return to equity required by shareholders. A more realistic notion is that the firm in question is financed with some allocation of debt and equity, in which case using the firm's WACC is most appropriate.

How is NPV calculated?

The NPV is the sum of the discounted future cash flows less the cost of undertaking the project. For example, if Firm A wants to acquire Firm B for $50 million and expects Firm B to produce cash flows of 15,000,000, 20,000,000, and 27,500,000 at the end of each of the next three years, the NPV of the investment in Firm B would be $826,447 (using a discount rate of 10 per cent). To discount the future cash flows, simply take the expected cash flow divided by [(1+discount rate)^time period]. For example, in period 3, the $27.5 million cash flow is discounted by taking 27,500,000/[(1+10 per cent)^3].

Part 1-C

Since, the returns from the gold mine are monotonically increasing with passing years, the net present value of the inherited mine will automatically increase with the decrease in the discount rate. (Khan, 1993) As per calculations, the NPV is lowest ($157,993,784.82) at the discount rate of 8 per cent and highest ($178,574,750.10) at 4 per cent.

Part 2

Interstate Travel Center

Interstate Travel Center is intended to be the major travel center in Dallas, Texas. It will consist of a convenience store, gas/diesel islands, restaurant, and amenities for the trucking business. Interstate Travel Center is a corporation owned and operated by Steve and Janet Smith.

Based on value of service, trucking (excluding warehousing and ...