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    Calculating The NPV

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    noxa
    The document describes how to calculate the net present value (NPV) of projects. There are three key steps: 1) create a table with the discount rate, estimated cash flows for each year, and discounted cash flows; 2) calculate the discounted cash flows by multiplying the discount rate by the estimated cash flows; 3) calculate the NPV by adding the discounted cash flows. The example shows calculating the NPV for two projects, with Project 1 having a higher NPV of R2,100 compared to Project 2's NPV of -R56,407.50, indicating Project 1 is the best option.

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    Calculating The NPV

    Uploaded by

    noxa
    131 views3 pages
    The document describes how to calculate the net present value (NPV) of projects. There are three key steps: 1) create a table with the discount rate, estimated cash flows for each year, and discounted cash flows; 2) calculate the discounted cash flows by multiplying the discount rate by the estimated cash flows; 3) calculate the NPV by adding the discounted cash flows. The example shows calculating the NPV for two projects, with Project 1 having a higher NPV of R2,100 compared to Project 2's NPV of -R56,407.50, indicating Project 1 is the best option.

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    Calculating the NPV

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    The document describes how to calculate the net present value (NPV) of projects. There are three key steps: 1) create a table with the discount rate, estimated cash flows for each year, and discounted cash flows; 2) calculate the discounted cash flows by multiplying the discount rate by the estimated cash flows; 3) calculate the NPV by adding the discounted cash flows. The example shows calculating the NPV for two projects, with Project 1 having a higher NPV of R2,100 compared to Project 2's NPV of -R56,407.50, indicating Project 1 is the best option.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    131 views3 pages

    Calculating The NPV

    Uploaded by

    noxa
    The document describes how to calculate the net present value (NPV) of projects. There are three key steps: 1) create a table with the discount rate, estimated cash flows for each year, and discounted cash flows; 2) calculate the discounted cash flows by multiplying the discount rate by the estimated cash flows; 3) calculate the NPV by adding the discounted cash flows. The example shows calculating the NPV for two projects, with Project 1 having a higher NPV of R2,100 compared to Project 2's NPV of -R56,407.50, indicating Project 1 is the best option.

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    CALCULATING THE NET PRESENT VALUE (NPV)

    2 IMPORTANT VARIABLES THAT WILL ALWAYS BE GIVEN ARE:


     The ESTIMATED CASH FLOW FOR EACH PROJECT
     The DISCOUNT FACTOR RATE (TABLE WILL BE GIVEN IN THE EXAM – see below)

    YOU NEED TO DETERMINE


     THE DISCOUNTED CASH FLOW of each project from 0-6 years first, and then the
     NPV

    MAY 2014 EXAM – Question 2

    STEP 1
     DRAW TABLE
     SELECT THE CORRECT DISCOUNT RATE (As the question above states, you need to select the
    discount rate column at 8%) and then INSERT the rate into the COLUMN as illustrated below.
     INSERT the ESTIMATED CASH FLOW for each project as given.
    Year DISCOUNT ESTIMATED DISCOUNTED ESTIMATED DISCOUNTED
    FACTOR @8% CASH FLOW CASH FLOW CASH FLOW CASH FLOW
    Discount Rate Project 1 Project 2
    0 1 -R 250,000 ? -R 300,000 ?
    1 0,9259 R 25,000 ? R 25,000 ?
    2 0,8573 R 25,000 ? R 50,000 ?
    3 0,7938 R 50,000 ? R 75,000 ?
    4 0,735 R 50,000 ? R 50,000 ?
    5 0,6806 R 100,000 ? R 50,000 ?
    6 0,6302 R 100,000 ? R 75,000 ?
    NPV ? ?

    STEP 2
     Multiply the Discount rate with the Estimated Cash Flow value for each project starting from
    0 to 6 years. (DISCOUNT RATE x ESTIMATED CASH FLOW = DISCOUNTED CASH FLOW)
    Year DISCOUNT ESTIMATED DISCOUNTED ESTIMATED DISCOUNTED
    FACTOR @8% CASH FLOW CASH FLOW CASH FLOW CASH FLOW
    Discount Rate Project 1 Project 2
    0 1 -R 250,000 -R 250,000 -R 300,000 -R 300,000
    1 0,9259 R 25,000 R 23,147.5 R 25,000 R 23,147.5
    2 0,8573 R 25,000 R 21,432.5 R 50,000 R 42,865
    3 0,7938 R 50,000 R 39,690 R 75,000 R 59,535
    4 0,735 R 50,000 R 36,750 R 50,000 R 36,750
    5 0,6806 R 100,000 R 68,060 R 50,000 R 34,030
    6 0,6302 R 100,000 R 63,020 R 75,000 R 47,265
    NPV ? ?

    STEP 3
     Add the values in the DISCOUNTED CASH FLOW column, which totals the NPV
    Remember to take into account the positive and negative signs of each value!!
    Year DISCOUNT ESTIMATED DISCOUNTED ESTIMATED DISCOUNTED
    FACTOR @8% CASH FLOW CASH FLOW CASH FLOW CASH FLOW
    Discount Rate Project 1 Project 2
    0 1 -R 250,000 -R 250,000 -R 300,000 -R 300,000
    1 0,9259 R 25,000 R 23,147.5 R 25,000 R 23,147.5
    2 0,8573 R 25,000 R 21,432.5 R 50,000 R 42,865
    3 0,7938 R 50,000 R 39,690 R 75,000 R 59,535
    4 0,735 R 50,000 R 36,750 R 50,000 R 36,750
    5 0,6806 R 100,000 R 68,060 R 50,000 R 34,030
    6 0,6302 R 100,000 R 63,020 R 75,000 R 47,265
    NPV R2,100 -R56,407.50

    The Project with the BEST NPV is Project 1


    TRY TO ATTEMPT THE NOVEMBER 2014 EXAM QUESTION 2
    Project C had the best NPV of R7, 416.
    Calculate the NPV of Project A and B and confirm whether C has the most favourable NPV of
    the 3 Projects.

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