Investment Analysis: NPV Calculation and Project Evaluation

This document provides an in-depth analysis of Net Present Value (NPV) and its application in investment analysis. It explains the concept of NPV, its calculation, and its significance in evaluating the viability of investment projects. The document includes a case study on Pristine Urban-Tech Zither, Inc. (PUTZ) and examines the NPV for different scenarios. It also discusses the factors influencing NPV and emphasizes the importance of considering the time value of money.

Running Head; NPV
INVESTMENT ANALYSIS
NAME OF STUDENT
NAME OF UNIVERSITY

INVESTMENT ANALYSIS
Pristine Urban-Tech Zither,Inc. (PUTZ) .
NPV is the current value of the net flows for the project. So, we will calculate the net cash
flows. The required rate of return is 13 %. This rate of return is the opportunity cost. We will
use this rate to calculate the net present value of the future cash flows. This give us the
present value of the flows assuming we have received them in the current period. This is
important as the future cash flows are worth less in the current period due to the discount
factor (Zizlavsky,2014). It simply calculates the time value of money.
In determining the net present value of the project, I will first tabulate the inflows for the
project. Inflows will be the cash inflows that will be received during the four years in relation
to this project (Kenton,2019).
The first item is the profit to be made from the launch of the product. I will compute the net
profit based on projection of unit sales and related costs. For sales I will multiply the
premium that can be charged of $750 by unit sales. The variable costs are 15% of sales. Fixed
cost is set at 415,000.00
Deprecation is computed by taking the cost less scrap value and prorate that by three years.
The depreciation for the equipment is (3,500,000-350,000 )/3= 1,050,000.00
Profit calculation
Year 1 Year 2 Year 3 Year 4
Unit sales 3600 4300 5200 3900
Sales 2 700 000,00 3 225 000,00 3 900 000,00 2 925 000,00
Less.
Fixed costs 415 000,00 415 000,00 415 000,00 415 000,00
Variable costs @15% of
sales 405 000,00 483 750,00 585 000,00 438 750,00
Depreciation (3,5-,35)/3 1 050 000,00 1 050 000,00 1 050 000,00 -
Gross profit 830 000,00 1 276 250,00 1 850 000,00 2 071 250,00
Tax at 38% 315 400,00 484 975,00 703 000,00 787 075,00
After tax profit 514 600,00 791 275,00 1 147 000,00 1 284 175,00
Scrap sale 350 000,00
Net profit 514 600,00 791 275,00 1 147 000,00 1 634 175,00
The second item is land which can be sold now or in four years’ time at 2,1 million or 2,4
million respectively. This will present us with two scenarios. However, we will only
recognise the gain.
The third item is scrap value of the equipment on the fourth year at 350,000.00.
The outflows in this case are the working capital, cost of equipment and the one-off
marketing survey expense.
Scenario 1

INVESTMENT ANALYSIS
(if Land is sold now)
Year 0 Year 1 Year 2 Year 3 Year 4
Capital Outlay
Equipment -3 500 000,00
Fixed costs
Marketing expenses - 125 000,00
Working capital - 125 000,00
Inflows
Gain on sale of
land(2,3m-2,1m) 200 000,00
Profit - 514 600,00 791 275,00 1 147 000,00 1 634 175,00
Net cash flows(Add
all) -3 550 000,00 514 600,00 791 275,00 1 147 000,00 1 634 175,00
Discount
factor(1/(1+,13)^n 1,00 0,88 0,78 0,69 0,61
NPV -3 550 000,00 455 398,23 619 684,39 794 928,54 1 002 270,13
Total NPV(Sum of
NPV) - 677 718,71
Scenario 2
Land is sold in Year
4.
Year 0 Year 1 Year 2 Year 3 Year 4
Capital Outlay
Equipment -3 500 000,00
Fixed costs
Marketing expenses - 125 000,00
Working capital - 125 000,00
Inflows
Gain on sale of
land(2,4m-2,1m) 300 000,00
Profit - 514 600,00 791 275,00 1 147 000,00 1 634 175,00
Net cash flows(Add
all) -3 750 000,00 514 600,00 791 275,00 1 147 000,00 1 934 175,00
Discount
factor(1/(1+,13)^n 1,00 0,88 0,78 0,69 0,61
NPV -3 750 000,00 455 398,23 619 684,39 794 928,54 1 186 265,75
Total NPV(Sum of
NPV) - 693 723,09

INVESTMENT ANALYSIS
The calculated NPV for both scenarios where land is sold now or after four years is
If land is sold now - 677 718,71
If land is sold after four years. - 693 723,09
The NPV for both scenarios irrespective of when the land is sold is negative. This project will
result in a net loss (Obaidullah,2014). When the land is sold in the current period the NPV
will be higher than if if the land is sold after four years. Its better to sell the land in the current
period.
For the project to be viable it should return a positive NPV. Based on above ,the
fundamentals should be reviewed again. The outflows should be reviewed to see if the can be
reviewed downwards.

INVESTMENT ANALYSIS
References.
Henisz, W. (2019). The Costs and Benefits of Calculating the Net Present Value of
Corporate Diplomacy. Retrieved from https://journals.openedition.org/factsreports/4109
Magni, C. (2005). Retrieved from
https://mpra.ub.uni-muenchen.de/7451/1/MPRA_paper_7451.pdf
Net Present Value (NPV) - Definition, Examples, How to do NPV Analysis. (2019).
Retrieved from https://corporatefinanceinstitute.com/resources/knowledge/valuation/net-
present-value-npv/
Net present value (NPV) method - explanation, example, assumptions, advantages,
disadvantages | Accounting for Management. (2019). Retrieved from
https://www.accountingformanagement.org/net-present-value-method/
NPV -- Net Present Value -- Definition & Example. (2019).
Retrieved from https://investinganswers.com/dictionary/n/net-present-value-npv
Obaidullah, O. (2014). NPV and Taxes | Calculation | Formulas | Example.
Retrieved from https://xplaind.com/633736/npv-and-taxes
Kenton, W. (2019). Net Present Value (NPV).
Retrieved from https://www.investopedia.com/terms/n/npv.asp
Zizlavsky, O. (2014). Retrieved from
https://www.researchgate.net/publication/275544840_Net_Present_Value_Approach_Method
_for_Economic_Assessment_of_Innovation_Projects