What is the NPV for a project if the cost capital is 12% and the initial after-tax cost is $5,000,000 and is expected to provide after-tax operating cash flows of $1,800,000 in year 1, $1,900,000 is year 2, $1,700,000 in year 3, and ($1,300,000) in year 4?

avdosha

I got $396,194.11 from Excel Try it, the formula is NPV you enter the percentage (12%) and for value1, value2 etc all the cash flows. I'm not sure if it's right though

morgaine300

You will need to find the present value of each of these cash flows separately because they are not equal amounts. You can use the year number as the periods. (i.e. year 1 is 1 period, year 2 is 2 periods, etc.) Note the last is a negative cash flow. These will get progressively smaller, because the longer something can sit earning 12% the less you need to get there. (i.e. a present value is like saying what would it take today in order to get to this amount in the future. So it would take less to get to $1000 in 2 years than it would in only 1 year.)

Add up your four present values, which will give you the present value of the entire return.

Then you compare that with the initial investment. You're looking at the difference between the present value of the return it will get you with the actual investment itself. So the net present value is the difference between these two.

How you figure the present values will depend on the method your book/class is using. There are actually four methods. It would be difficult to go over all four methods, especially since financial calculators and equations both can use different letters representing different things. Since yours is annually compounded that will make it easier because the total periods is the same as the total years. You also don't have to split your interest rate down. So whatever method, you have 12%, and you'll have 1, 2, 3 & 4 periods for each different amount. And the NPV on Excel is not the same as the NPV you're needing to find. It only provides the present value of the four cash flows and not the "net."

Give this a try. If you'll post your calculations someone can check it. If you're having trouble getting the present values, you need to say what method you're using and what questions you have about it.

Marie3

Thanks for your help with this! :-) Using the Net Present Value Method,I came up with the answer of -1,494,700. I first used my PVIV table that was supplied for the 12% interest which was 0.893 for year 1, 0.707 for yr2, 0.712 for yr 3, & 0.636 for yr 4. I then multiplied each amount by the appropriate PVIF amount from the PVIF table (ex. 1,800,000 X 0.893= 1,607,400). Which gave me 1,607,400 for yr 1, 1,514,300 for yr 2, 1, 210,400 for yr 3, & -826,800 for yr 4. I then added up -5,000,000 for yr 0, and the other cash flows and came up with -1,494,700. Is this correct? I wasn't sure if I should calculate the initial after-tax cost of the 5,000,000 as a positive or negative number. If you added up with a positive instead of a negative number, you come up with 8,505,300, but I think the -1,494,700 is correct. Can someone check my answer. Thanks Again...

morgaine300

Hi Marie. All of your work is correct. Your answer is about $300 off mine due to the rounding issues with the tables, but that's common.

Subtracting the two is correct -- it would not be 8,505,300. One is an outlay of cash (5,000,000) and the total of the present values is incoming cash. Those are opposites. And yes, the answer is also negative. The outlay of cash is higher than the present value of the incoming cash. So the net is negative.

christyb07

When using Excel, use the XNPV formula to get the correct calculation for NPV.

morgaine300

?? Mine doesn't have that. Is that an extra plug in or something?