Examples of NPV (Net Present Value)
Net Present Value (NPV) refers to the dollar value derived by deducting the present value of all the cash outflows of the company from the present value of the total cash inflows and the example of which includes the case of the company A ltd. where the present value of all the cash outflows is $100,000 and the present value of the total Cash inflows is $120,000, so the net present value will be $20,000 ($120,000 – $100,000)
The following NPV examples (Net Present Value) provides an outline of the most common investment decisions. It is impossible to provide a complete set of examples that address every variation in every situation since there are thousands of such projects with Net Present Value analysis. Each example of the NPV states the topic, the relevant reasons, and additional comments as needed
The net present value is the difference between the present value of future cash inflow and the present value of cash outflow over a period of time. NPV is widely used in capital budgeting and to know the profitability of the project.
- If the Net present value is positive then the project should be accepted. It indicates that earning from the project is more than the amount invested in the project, so the project should be accepted.
- If the Net present value is negative then it indicates that the project in which we invested the money does not provide a positive return so the project should be rejected.
Mathematically, NPV Formula is represented as,
Where
- i stands for the Required Rate of Return or Discount Rate
- t stands for Time or Number of Period
NPV = Cash flows /(1- i)t – Initial investment
= 100000/(1-10)^3-80000
NPV = 57174.21
So in this example, NPV is positive so we can accept the project.
Example #2
In 2nd example, we will take the example of WACC (weighted average cost of capital) for calculating the NPV, because in WACC we consider the weight of equity and debt also the cost of equity and debt. Calculate the NPV.
Solution:
Company XYZ Ltd provides the following detail regarding their project for 10 years.
Free cash flow to the firm is given below over a period of time. And WACC is 15 %
Calculation of NPV can be done as follows,
NPV =1104.55
In this example also Net present value is positive so we can or we should accept the project
Example #3
Maruti is in the business of auto and ancillary and they want to start their subsidiary business as an expansion plan for assembling of the auto part so they had provided below information for calculating the NPV. They want to know should this project will be feasible or not.
- Cost of equity – 35%
- Cost of debt – 15%
- The weight of equity – 20%
- The weight of debt – 80 %
- Tax rate – 32%
- Cash flow is given below for 7 year
- 2010= -12000
- 2011=10000
- 2012=11000
- 2013=12000
- 2014=13000
- 2015=14000
- 2016=15000
Find the NPV with the help of WACC.
Solution:
Calculation of WACC can be done as follows,
WACC formula = We*Ce+Wd*Cd*(1-tax rate)
= 20*35+80*15*(1-32)
WACC = 15.16%
Calculation of NPV can be done as follows,
NPV = 29151.0
In this example, we are getting a positive net present value of future cash flows, so in this example also we will accept the project.
Example #4
Toyota wants to set up one new plant for expansion of current business so they want to check the feasibility of the project. Toyota had provided the following information regarding cash flows and WACC. Cash flow during the period is as follow.
- 2008 = -4000
- 2009= -5000
- 2010= 6000
- 2011=7000
- 2012=9000
- 2013= 1200
Solution:
Calculation of NPV can be done as follows,
NPV = 12348.33
Recommended Article
This has been a guide to NPV Examples. Here we learn how to calculate NPV (Net Present Value) step by step with the help of practical examples. You may learn more about financing from the following articles –
- What is the Nominal Rate of Return?
- Importance of Capital Budgeting
- Top 5 Best Capital Budgeting Techniques
- Examples of Capital Budgeting
- Marginal Tax Rate | Definition
- Formula of Time Value of Money
- PV of an Annuity
- PV vs NPV – Compare
- NPV vs IRR – Compare
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