Net Present Value (NPV) method is one of the most important methods which is used to make capital budgeting decisions by almost every company. NPV method is important because it helps financial managers to maximize shareholders’ wealth by making better capital budgeting decisions.
Suppose Google (http://finance.yahoo.com/q?s=goog&ql=1) is considering a new project that will cost $2,425,000 (initial cash outflow). The company has provided the following cash flow figures to you:
Year |
Cash Flow |
0 |
-$2,425,000 |
1 |
450,000 |
2 |
639,000 |
3 |
700,000 |
4 |
550,000 |
5 |
1,850,000 |
If Google's cost of capital (discount rate) is 11%, what is the project's net present value? Based on your analysis and findings, what would you recommend to the executives and the shareholders of Google? Should the project be accepted? The shareholders of Google would also like to know the meaning of NPV concept.
You may use the following steps to calculate NPV:
PV of CF = CF_{1} / (1+r)^{1} + CF_{2} / (1+r)^{2} + CF_{3} / (1+r)^{3 }+ CF_{4} / (1+r)^{4} + CF_{5} / (1+r)^{5}
NPV = Total PV of CF – Initial cash outflow
or
Subject | Business |
Due By (Pacific Time) | 02/27/2014 12:00 pm |
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