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Assessment on Net Present Value

   

Added on  2021-06-17

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Finance
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Assessment Item 3
Assessment on Net Present Value_1

Answer 1Calculation For NPVThere are various methods to estimate the profitability of any projects. NPV (Net Present Value)is one of the most popular techniques among them. This is mainly because the technique utilizesthe time value of money concept to calculate the present value of the future cash flows taking thediscount rates into consideration. In addition to it, the tool offers concrete values in respect of theviability of project[CITATION Eri11 \l 1033 ]. Net Present Value (NPV) is a comprehensive way of corporate budgeting to calculate whether aproposed project will be profitable or not. NPV calculation involves many financial topics in oneformulae like after tax cash flows, time value of money, discounted rate and initial investmentetc. The projects having NPV greater than zero is a value added project for the organization. Theorganization should select the project with highest NPV value. For monthly compounding ofNPV, the discount rate is divided by 12. It deals with the time value of money that means that thevalue of money is affected by time. Net Present Value of a project is the sum of discountedfuture cash flows of the business. Project resulting in negative NPV would be a loss. It is animportant tool for long term projects as it involves the calculation of time value of money. If allthe cash flows are positive, the NPV is simply the difference between the cash inflows and cashout flows. NPV compares the time value of money taking inflation into account. Home Guardian in its two year study on its new pest control device has positive cash inflows. Oncalculation of monthly NPV the value will be greater than 1. So the firm should undertake theproject as it will be profitable and will add value to the organization as it has the positive NPVvalue [CITATION Dan \l 1033 ].
Assessment on Net Present Value_2

The net present value of a project is the amount that would be added to the total worth of thecompany, if the project gets selected. The criteria for the decision making depends on two mainfactors. In case the net present value of the project is less than zero then it will incur losses. Thisclearly reveals that the project, which incurs negative value of NPV, is going to make a loss andwill drain the cash from the business. The other side, in case NPV incurs positive value than theproject will be profitable in nature and it would be advised that the company need to accept thealternative. The net present value of this project comes out as $5344351, which clearly shows that by makingthis investment company's overall value would be increased by $5344351. The project isprofitable for the company as the project will create the value of $5344351.YearCashInflowCashOutflow0570000012000000950000220000009500003200000095000042000000950000541000001010000YearPV ofInflowsPV ofOutflows11785714.286446428.621594387.755757334.231423560.496676191.241271036.157603742.252326450.108573101.1NPV = $5,344,351
Assessment on Net Present Value_3

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