### Recent Question/Assignment

Time Value of Money

1. Net Present Value (NPV)

– is found by subtracting the initial investment from the present value of the cash inflow discounted at a rate equal to the firms cost of capital.

NPV – present value of cash inflows – initial investment

e.g. The calculation of NPV’s for benefit company’s capital expenditure alternatives

Use Table A-4 Project A

Annual cash inflow $14,000

X present value annuity interest factor, PVIF 3.791

present value of cash inflow $53,000

– initial investment 42,000

Net present value (NPV) $11,074

Use table A-3 Project B

Cash inflow Present-value interest factor (PVIF) Present value

(1)X(2)

Year (1) (2) (3)

1 $28,000 .909 $25,452

2 12,000 .826 9,912

3 10,000 .751 7,510

4 10,000 .683 6,830

5 10,000 .621 6,210

Present value of cash inflow $55,914

45,000

$10,914

– Initial investment

Net Present Value (NPV)

Decision Criteria

If NPV is greater than $ 0, accept the project if NPV

Is less than $0 , reject the project.

EXERCISE

Dane cosmetics is evaluating a new program-mixing machine. The asset requires an initial investment of $24,000 and will generate after tax cash inflow of $5,000 per year for eight years. For each of the required rate of return listed:

Calculate the net present value

indicate whether to accept or reject the machine

explain your decision

1. the cost of capital is 10 percent

2. the cost of the capital is 12 percent

3. the cost of capital is 14 percent

Use table A-4