Analysis of NPV and its Impact on Market Value of a Corporation

This article provides an analysis of Net Present Value (NPV) and its impact on the market value of a corporation. It discusses the concept of NPV, its calculation, and its relevance in evaluating the profitability of a project. The article also explores the relationship between NPV and the Efficient Market Hypothesis (EMH), as well as the implications of forecasting risk on project outcomes. The analysis is based on a case study of Auditizz Electronics, an Australian electronic firm.

Running head: AUDITIZZ
AUDITIZZ
Name of the Student
Name of the University
Author Note

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Table of Contents
Introduction......................................................................................................................................2
Discussion........................................................................................................................................2
Summary of the project...............................................................................................................2
Non discounted payback period of the project............................................................................3
ARR.............................................................................................................................................3
NPV and IRR...............................................................................................................................3
NPV`s sensitivity to changes in price and quantity.....................................................................3
Forecasting risk and implications for a project............................................................................8
Advise to the company................................................................................................................9
NPV and EMH.............................................................................................................................9
Impact of NPV on market value of the corporation....................................................................9
Conclusion.....................................................................................................................................10
References......................................................................................................................................11
Appendix........................................................................................................................................12

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Introduction
The discounted cash flow analysis can be rightfully described as a method of undertaking
the valuation of an asset by making use of the time value of money. In the given method, the
future cash flows are estimated and then are discounted by making use of the cost of capital so
that it becomes easier to find the present value of the asset (Damodaran 2016). When the sum of
all the future cash flows are taken into consideration, both the incoming as well as the out
coming ones, the net present value is taken as the value of the cash flows.
In this manner, the Net present value of a particular cash flow can be figured out and
helps in finding out the overall value of an asset and helps in finding out whether the purchase of
the asset will be beneficial for the long term of the firm or not (Dang, Li and Yang 2018). The
primary question answered in this procedure is the amount of money to be invested currently at a
given rate of return in order to ensure that the cash flow can be yielded in the future. The report
will undertake an analysis of a project and determine whether the project will be profitable in the
long run or not.
Discussion
Summary of the project
The project is related to the Auditizz Electronics which is an electronic firm as present in
Australia and currently they are seeking to develop a real time translator for which the figures of
the investment have been provided. This helps in understanding the overall investment and the
expected return of the investment.

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Non discounted payback period of the project
The non-discounted payback period of the project can be largely understood to be 2.27
years. The calculation of the same is present in the appendix.
ARR
The Average rate of return for the project was calculated by dividing the average profits
by the average investment as made in the project. The Average rate of return of the project was
calculated as 1.1325%. This means that the firm will get a return of 1.13 cent for every dollar
being invested in the project.
NPV and IRR
The Net present value which was calculated for the project came up to an estimation of
approximately $87949754. This can be stated to be a considerably good return.
The IRR of the project was calculated to be 35%. All the calculations have been provided
in the Appendix.
NPV`s sensitivity to changes in price and quantity
The Net present value can be understood to be the overall present value of the investment
when all the cash inflows and outflows are discounted to the present value using the time value.
It helps in assessing whether it will be better to invest in a project or not. The net present value of
the project can be considered to be related to the price of the project and the quantity of the units
being sold (Fracassi 2016). With respect to this, it can be understood that there exists a direct
relation between the quantity sold of a project and the price of the project with the Net present
value which means that, as the price of a quantity being sold increases, the NPV also increases
and as the quantity increases in numbers, the Net present value increases. This can be understood

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that, if the Price or the quantity goes down considerably then the NPV of the project will also
decrease and go down considerably. The given example can be used to understand the overall
aspect of the project:
Here the price and sales is initial
Year 1 Year 2 Year 3 Year 4
Sales
estimation 105000 156000 189000 175000
selling price 850 875.5
901.76
5
928.81
8
Year 1 Year 2 Year 3 Year 4
Revenue 89250000
13657800
0
17043358
5
16254314
1.3
Initial costs 19275000
Machine and
salvage value 103500000 20500000
Depreciation 17250000 17250000 17250000 17250000
Fixed cost 11200000 11200000 11200000 11200000
Variable costs 437750 459900.15 483171.09 507619.55

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76 51
Networking cap 22312500
Net cash flows 60362250
10766809
9.9
14150041
3.9
15408552
1.7
Post tax -145087500 42253575
75367669.
9
99050289.
73
10785986
5.2
npv
$87,949,754
.63
Here the NPV can be understood to be $87,949,754.63
Case 1: Prices changed
Sales
estimatio
n
10500
0
15600
0
18900
0 175000
selling
price 1000 1030 1060.9
1092.72
7
Changes in price

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Revenue
1050000
00 160680000 200510100 191227225
Initial costs 19275000
Machine and salvage
value 103500000 20500000
Depreciation
1725000
0 17250000 17250000 17250000
Fixed cost
1120000
0 11200000 11200000 11200000
Variable costs 437750 459900.15
483171.09
76
507619.55
51
Networking cap 22312500
Net cash flows
7611225
0
131770099
.9
171576928
.9
182769605
.4
Post tax -145087500
5327857
5
92239069.
9
120103850
.2
127938723
.8
NPV
$135,018,571.
97
It can be largely observed from this section that the NPV has increased to $135018571.9

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Case 2: If quantity changes
Sales
estimatio
n
20000
0
25000
0 280000 300000
selling
price 850 875.5
901.76
5
928.81
8
Revenue
1700000
00 218875000 252494200 278645385
Initial costs 19275000
Machine and salvage
value 103500000 20500000
Depreciation
1725000
0 17250000 17250000 17250000
Fixed cost
1120000
0 11200000 11200000 11200000
Variable costs 437750 459900.15
483171.09
76
507619.55
51
Networking cap 22312500

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Net cash flows
1411122
50
189965099
.9
223561028
.9
270187765
.4
Post tax -145087500
9877857
5
132975569
.9
156492720
.2
189131435
.8
NPV
$262,018,942.
37
Hence, even in this case, it was observed that the quantity change brings about an
increase in the NPV and it increases to $262018942. Therefore, it can it be stated in this regard
that, a change in the quantity and price of the project investment and its returns can bring about a
considerable change in the NPV and hence, the NPV can be understood to be sensitive to the
price and quantity of sales being made.
Forecasting risk and implications for a project
When an organization plans for the long run it is essentially required to ensure that it will
successfully able to forecast for the future. In line of this, it needs to be mentioned that, the
forecasting function forms an essential part of the organization and helps in future estimations.
However, there are various risks associated with it like risks of estimation (Gullifer and Payne
2015). The estimation which will be made for the forecast can go essentially wrong for a project
and with respect to a project and hence, in line of this, it may become essentially difficult for the
business to get right returns if their estimations are made wrong (Ehrhardt and Brigham 2016). In

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addition to this, very often the models being applied are not correct in nature and hence, this can
bring about a considerable loss for the firm and the new project undertaken.
These forecasting risks can be understood to have a direct impact on the project as it may
give incorrect return figures which may then give an incorrect estimation of the success of a
project for the firm.
Advise to the company
After the analysis of the project was conducted, it can be figured that the Net present
value of the project came up to $87,949,754.63 which can be understood to be a good return.
Hence, it is advisable that the project can be continued with as this will help in gaining huge
returns for the firm. Moreover, the returns are much more than the initial cost of investment and
will be beneficial for the organization (Johnson, McLaughlin and Haueter 2015).
NPV and EMH
The efficient market hypothesis can be understood to be a theory which states that the
asset prices tend to fully reflect the available information and hence, it is not possible to beat the
market consistently since the market prices only react to new information. The theory stated that
stocks operate at fair value which makes the exchange possible (Finance 2017). Generally,
trading information is generally reflected in prices and on the strong and semi strong form
insider information and no public information is known.
This can be stated to be a reason why the positive NPV provides a pricing which is
greater than the market requires because while indulging in an NPV all the information related to
the project is available and hence, a strong EMH case is presented.
Impact of NPV on market value of the corporation.

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The impact of NPV for the market value of a project may not be reflected externally but
can be considered to be relatively a good effect because, ultimately the project will bring about
greater results for the organization and hence, with respect to this, the firm will be successfully
able to earn a considerable amount of money once they are able to associate the project for the
long term welfare of the firm (Ehrhardt and Brigham 2016).
Conclusion
Therefore, from the given project the meaning and relevance of the Net present value in
relation to a project could be largely estimated. This means that, before any project is required to
be progressed with it can be considered to be relevant for the organization to engage in a
meaningful calculation of the Net returns and the Net present value as it will help in estimating
whether the project will bring about positive values for the firm or not. The particular project
was based on the NPV of Auditizz Corporation and how the project of the real time translator is
beneficial for itself. The associations of the Net present value with the market value of the firm
and the efficient market Hypothesis were also made.

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References
Damodaran, A., 2016. Damodaran on valuation: security analysis for investment and corporate
finance (Vol. 324). John Wiley & Sons.
Dang, C., Li, Z.F. and Yang, C., 2018. Measuring firm size in empirical corporate
finance. Journal of Banking & Finance, 86, pp.159-176.
Ehrhardt, M.C. and Brigham, E.F., 2016. Corporate finance: A focused approach. Cengage
learning.
Finance, C., 2017. Empirical Corporate Finance. Volume A.
Fracassi, C., 2016. Corporate finance policies and social networks. Management Science, 63(8),
pp.2420-2438.
Gullifer, L. and Payne, J., 2015. Corporate finance law: principles and policy. Bloomsbury
Publishing.
Johnson, C.J., McLaughlin, J. and Haueter, E.S., 2015. Corporate finance and the securities
laws. Wolters Kluwer Law & Business.

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Appendix