Evaluation and Technique - Net Present Value Approach

Question 1

Net Present Value

Answer 1

(NPV) is computed as: NPV = present value of cash inflows - present value of cash outflows

Assesses projects by comparing the present value of the expected cash inflows with expected cash outflows of the project

Determined by discounting flows to their present value using firm’s cost of capital as discount “HURDLE.” PV of expected cash outflows includes initial cash investment in project and subsequent costs of project. If net present value is 0 or positive then project feasible

the net present value method considers the entire period (life) of the project

the net present value method considers the entire period (life) of the project.

Question 2

Specific Considerations

Answer 2

Depreciation expense does not create cashflow; tax shield

Residual value is considered and any additional disposal cost would be incurred @ end of life also discounted and treated as a negative