Net Present Value (NPV) for Independent Project

Net Present Value (NPV) for Independent Project

Company may have some projects to make decision invest or not.  The independent project is one whose acceptance or rejection is independent of the acceptance or rejection of the other projects.

Project decision:

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

Example:

ABC Corporation applies a 12 percent discount rate to two investment opportunities, and we assume both projects are independent.

Required:

1. Determine NPVs for both projects.
2. Make decision for these projects.

Solution:

1. NPVs

NPV (project 1) = 70/(1+12%)^1 + 10/(1+12%)^2 – 20 =$ 50,500,000

NPV (project 2) = 15/(1+12%)^1 + 40/(1+12%)^2 – 20 =$ 35,300,000

2. Decision

NPV (project 1)= $50,500,000>0

NPV (project 2)= $35,300,000>0

Because both projects are independent, so we should choose both projects.

Source:

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