BUS 4404 UP Finance Net Present Value Calculation Steps Papers

Introduction

Unit 3 will first guide us through our final stage of understanding of time value of money with specific emphasis on calculating present values. The Unit will also present a set of business/project calculations that are integral to opening new lines of business. These assessment models: Pay-back, accounting rate of return, net present value, and internal rate of return are commonly used measures to evaluate business proposals. The primary emphasis of this unit will be net present value (NPV).

Chapter 1 of Corporate Finance II presents an overview of the capital budgeting process. The emphasis of page 12 in Chapter 1 is the decision-making process found in many business situations.

Chapter 11 of Finance and Chapter 4 of Corporate Finance – Basic present the models (conceptualize them as tools) used by business management to guide (and to provide justification for) their decision.

Reading Assignment

Required:

Boundless. (2023, February 18). Boundless Finance. Available at https://www.coursesidekick.com/finance/study-guides/boundless-finance

·       Chapter 11 Capital Budgeting

Pages 24-26 and 42-48 – Compendium. Corporate Finance. (2008). BookBoon: Ventus Publishing ApS. Available at http://my.uopeople.edu/pluginfile.php/56304/mod_page/content/7/CorporateFinanceBasic.pdf

Chapter 1, Pages 7-13 – Nielsen, K.M. (2010). Corporate Finance: Part II – Budgeting, Financing & Valuation. BookBoon: Ventus Publishing ApS. Available at http://my.uopeople.edu/pluginfile.php/56304/mod_page/content/7/CorporateFinanceII.pdf

Discussion Assignment

Using your own words (do not cut and paste an example from another source) please state and explain the computational steps of a Net Present Value (NPV) calculation. What information does NPV provide a management team of a business and what kind of decision is made by management when it considers a project’s NPV?

Written Assignment

In order to expand its bottled water business, a local company is considering the acquisition of additional equipment. It plans to buy the equipment. The total cost of the equipment (as one initial payment at the beginning of the project) is $200,500. During the time span of its use, the equipment is expected to produce net cash inflows of $67,000 each year. The equipment is expected to be used for 4 years, then re-sold in the used-equipment market for $25,000. The discount rate (the rate of return assumption for the project) is 12%. What is the net present value (NPV) of this project?

12%

Period                   FV               FV Annuity             PV            PV Annuity

1                       1.120                   1.000                  0.893             0.893

2                       1.254                    2.120                0.797             1.690

3                       1.405                    3.374                 0.712              2.402

4                     1.574                      4.779                0.636             3.037

5                   1.762                      6.353                  0.567               3.605

6                   1.974                       8.115                0.507                 4.111

7                      2.211                  10.089                0.452                4.564

8                     2.476                   12.300               0.404                4.968

9                   2.773                      14.776                 0.361               5.328

10              3.106                     17.549                  0.322                  5.650

Learning Journal

Please write at least three well composed paragraphs that describe the following capital budgeting calculations: Pay-back, Net Present Value (NPV), and Internal Rate of Return (IRR). Compare the calculations to each other and briefly discuss which method you think is most useful.