1.14 NPV Solutions
Example #1:
| Year | Cash Flow | PVF | PVCF |
| 0 | ($2,500) | 1.0000 | ($2,500) |
| 1 | 250 | .9259 | 231.48 |
| 2 | 500 | .8573 | 428.65 |
| 3 | 1,000 | .7938 | 793.80 |
| 4 | 1,500 | .7350 | 1,102.50 |
| 5 | 2,000 | .6806 | 1,361.20 |
| NPV= | 1,417.63 |
Example #2:
| Year | Cash Flow | PVF | PVCF |
| 0 | ($2,500) | 1.0000 | ($2,500) |
| 1 | 2,000 | .9259 | 1,851.80 |
| 2 | 1,500 | .8573 | 1,285.95 |
| 3 | 1,000 | .7938 | 793.80 |
| 4 | 500 | .7350 | 367.50 |
| 5 | 250 | .6806 | 170.15 |
| NPV = | 1,969.20 |
Note: that the timing of the cash flows is included in the NPV model.
The decision rule for NPV is to:
- Accept any independent, non-competing project with a positive NPV. The NPV is a useful measure as it tells management by how much it may expect the project to increase the firm’s wealth on a present value basis.
- Accept that project – among mutually exclusive alternatives – whose NPV is greatest, assuming it is positive.
He who knows only his own side of the case knows little of that.
–John Stuart Mill