Net Present Value (NPV) for Financing Project

Financing Project

NPV= Cash receipt –  sum of present value of each cash outflow

There are two types of  sum of present value of each cash outflow:

1. Annuity

   

2. Not Annuity

   

Project decision:

• if NPV>0=> accept the project
• if NPV<0=>reject the project
• if NPV=0=>indifference

Example:

Suppose you are offered $5,000 today but must make the following payments.

 

Required

1.What is the NPV of the offer if the appropriate discount rate is 10 percent? 20 percent?

2.Should you accept this offer for separate discount rate?

Solution:

1.Calculation of NPV:

-Discount rate = 10%

NPV = 5,000 – 2,500/(1+0.1)^1 – 2,000/(1+0.1)^2

–1,000/(1+0.1)^3- 1,000/(1+0.1)^4= – $359.95

-Discount rate = 20%

NPV = 5,000 – 2,500/(1+0.1)^1 – 2,000/(1+0.1)^2

– 1,000/(1+0.1)^3- 1,000/(1+0.1)^4= $466.82

2. Offer decision:

-Discount rate = 10%

NPV = – $359.95 < 0 => reject this offer.

-Discount rate = 20%

NPV = $466.82 >0 => accept this offer.

Source:

1. Mcgraw-Hill – Fundamentals Of Corporate Finance
2. Phnom Penh HR