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Essay / Research Paper Abstract
This 4 page paper assesses two projects showing NPV calculations. The paper presents the net present values, looks at which of the projects could be accepted and then considers how NPV can be used and other issues that should be taken into account before a decision is made. The bibliography cites 5 sources.
Page Count:
4 pages (~225 words per page)
File: TS14_TEprojNPV.rtf
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Unformatted sample text from the term paper:
of this is to take the future net cash flows of a business and discounts them so that they can be presented in todays value. This allows different projects to
be compared. The process is to take each years cash flow and discount it by a factor. In the first project this company has an opportunity to invest in there
is an assess cost of capital of 10%. Therefore, we need to use 10% to discount the cash flow. In the first year the factor is calculated by dividing 1
by 1.1 (the .1 being the 10%) (Elliot and Elliott, 2005).Each year the following years discount is taken and divided by the same 1.1 (Watts, 1996). Project As calculation
is shown in figure 1 Figure 1 NPV for Project A Project A Revenue Discount factor Present value Accumulative PV Year 1 50,000 0.909091 45,454.55 45,454.55 Year 2 40,000 0.826446
33,057.85 78,512.40 Year 3 30,000 0.751315 22,539.44 101,051.84 Year 4 10,000 0.683013 6,830.13 107,881.98 Less initial investment 100,000 Net Present Value 7,881.98 Project B is seen as more risky. So
whole the cost of capital remains the same, there has been the suggestion of an inclusion of a risk premium in the level of the discounting, making the discount level
15%. This means the same process is used but the factors are gained by divided by 1.15 this time. The NPV calculation is shown in figure 2 Figure 2 NPV
Calculation for Project B Project B Revenue Discount factor Present value Accumulative PV Year 1 20,000 0.869565 17,391.30 17,391.30 Year 2 40,000 0.756144 30,245.75 47,637.05 Year 3 50,000
0.657516 32,875.81 80,512.86 Year 4 60,000 0.571753 34,305.19 114,818.06 Less initial investment 100,000 Net Present Value 14,818 Question 2 If we look at the way an NPV works, there is
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