finance - npv

8/13/2019 Finance - NPV

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Medyanikova Anna Corporate Finance Pf. Tsiklis

Question 1:

Initial investment:

Price: 30.000Installation: 3.000Installed value: 33.000-10% credit tax: (3.300)

Net investment: => 29.700

Depreciation/ year = (Initial investment- salvage value)/20 years

=> (29.700-2.000)/20 = 1.385 = Earnings before taxes EBT

Cash flow (year 0-19) => annual cash savings- EBT=>9.000-1.385=7.615Net income => 7.615*(1-40%(marginal tax rate))=4.569

Cash flow (year 20) => 9.000-1.385=7.615Net income => 7.615*(1-40%)= 4.569+ Depreciation 1.385=5.954+Salvage value (2.000)=> 7.954

PV (CF 0-19) = 5.954*7.366 = 43.857.16 (7.366 = PVIF annuity: I = 12%, t =19)

PV (CH 20) = 7.954*0.104 = 827.22 (0.104 = PVIF single sum: I = 12%, t = 20)

NPV = -29.700 + 43.857.16 + 827.22 = 14.984.38

=> The project is feasible

Question 2:

Initial investment => 1.230$

Year Net Cash Flow ($)

1 800

2 200

3 400

NPV = -1.230+800/(1+r)^1 + 200/(1+r)^2 + 400/(1+r)^3




r = 8%

NPV = -1.230 +740.85 + 171.53 + 317.62 = 0

IRR = 8%

Question 3:

Project Net Investment ($) Net Present Value($)

1 200,000 20,000

2 500,000 41,000

3 275,000 50,000

4 150, 000 5,000

5 250,000 20,000

6 100,000 5,0007 275,000 22,000

8 200,000 -18,000

PI = Sum of total cash flows/Net investment .

NPV= Sum of total cash flows- Net Investment

Project Sum of total cash flows(NPV + Net investment)($)

PI (Sum of total cash flows/Net investment)($)

1 220,000/200.000 1,1

2 541,000/500.000 1,082

3 325,000/275.000 1,1818

4 155,000/150.000 1,033

5 270,000/250.000 1,08

6 105,000/100.000 1,05

7 297,000/275.000 1,08

8 182,000/200.000 0,91

Ranking of the projects:

Project Ranking

1 2

2 3

3 1

4 6

5 4

6 5

7 4

8 7




Considering the capital constraints, which projects should be adopted? Are

all capital funds expended?

Based on the analysis of Profitability Index ranking of projects, we should adopt

projects 3,1 and 2, which will cost 975.000$ in terms of initial investment. There

are 25.000$ left. The next more profitable project according to the ranking is

project 5 as well as 7, which gave us the same PI results, however in terms of

initial investment the project 5 is less expensive, where it would be beneficial to

invest. However, we don’t have enough money to invest in.

Is there another combination that produces a higher aggregate net present

value than the one developed in the previous question?

Due to the fact that we don’t have the information about time period of recover

for the investment, we couldn’t find another combination of the projects, which

could complied with NPV, to invest to.

If less than the entire amount of available funds is invested, what is the

opportunity cost of unused funds?

As it was mentioned before, we have 25.000$ left after investing in the most

promising projects, the opportunity cost of these unused funds will be the

possibility to invest them in other projects and receive expected rate of return

from these projects.

finance - npv

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