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NPV Calculation for Investment Decision

The document discusses the calculation of Net Present Value (NPV) to determine the viability of an investment project. It outlines the use of cash flow projections and discount rates, specifically mentioning a 15% discount rate for Raft Adventures. The final NPV calculation indicates a positive value, suggesting that the project should be pursued as the present value of cash flows exceeds the initial investment costs.

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ghaniaahmad2003
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5 views15 pages

NPV Calculation for Investment Decision

The document discusses the calculation of Net Present Value (NPV) to determine the viability of an investment project. It outlines the use of cash flow projections and discount rates, specifically mentioning a 15% discount rate for Raft Adventures. The final NPV calculation indicates a positive value, suggesting that the project should be pursued as the present value of cash flows exceeds the initial investment costs.

Uploaded by

ghaniaahmad2003
Copyright
© All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as XLSX, PDF, TXT or read online on Scribd

**dividends are gr

Rearrange formula and solve for rE


30 = 3 / (rE - 0.01)

rE = 0.11

11%
return investors demand on the investment
idends are growing at the same rate, so we use the constant dividend growt
nt dividend growth model
**In order to determine whether a project should be taken on or not
if the PV of the cashflows are greater than the intial investment).

There are 2 ways we can solve this.


#1 use formula
NPV = PV of cashflows - PV of intial investment **find pv of each

pv of yr1 8.92857142857143

pv of yr2 15.9438775510204

pv of yr 3 14.2356049562682

pv of yr4 9.53277117607247

total pv 48.64082511

subtract outflo -1.35917489


NPV = -1.36

#2 OR Use NPV formula


NPV = -$1.36=NPV(0.12,10,20,20,15) - 50
e taken on or not we need to determine the NPV of the project (ie. We need
investment).

**find pv of each cash flow


ject (ie. We need to see
If RiverRocks is going to acquire Raft Adventures, then it should use a
appropriate for the risk of Raft Adventures’ cash flows. That should be
Adventures, which is 15%. So RiverRocks should use 15% as the discou
evaluation of the acquisition.

**the higher the weighted average, the riskier the investm


n it should use a discount rate that is
ws. That should be the WACC of Raft
15% as the discount rate for its

iskier the investment


NPV = PV of cashflows - PV of intial investment costs. Essentially, NPV

We can describe the cashflows as a growing perpetuity. To find the PV

PV = FCF1/(r-g)^n FCF1=15 million


free cashflow 1 r=WACC = 0.15
g = 0.04

Therefore, the NPV = FCF1/(r-g)^n - FCF0

NPV = 36363636.36
NPV = =(15000000/(0.15-0.04)^1) - 100000000
**cant use excel for a perpetuity
s. Essentially, NPV helps to determine the PV of cash flows after the intial cos

uity. To find the PV of the cashflows we can use the growing perpertuity form

FC0 = intial investment costs


for a perpetuity
fter the intial costs.

g perpertuity formula:
The direct issuing costs should be included as a direct cost of the acqu

NPV = $ 36,363,636.36
New NPV = $ 29,363,636.36

The NPV is positive which means the PV of the cashlfows are greater t
with the project.
cost of the acquisition.

ws are greater than the PV of costs of the project. Therefore, they should go
e, they should go ahead

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