Net Present Value (NPV) Definition and Meaning

Question: Describe about the Net Present Value (NPV) of Definition and Meaning? Answer: WACC WACC is a computation of a company's cost of capital in which every class of capital is proportionately weighted. All capital sources - common stock, bonds and some other long term obligation - are incorporated in a WACC computation. All else break even with, the WACC of a firm increments as the beta and rate of return on equity increments, as an increment in WACC noticed a lessening in valuation and a higher risk. CAPM can be used to estimate the cost of equity which is a part of WACC. Ke 0.15 Kd 0.07 WACC 0.096 Where Ke is the cost of equity and Kd is the cost of debt after tax. Net Present Value Using the NPV technique, one would discount all the relevant cash flows in the given scenario using the WACC of the company. The rule that applies is to accept any project that has a positive NPV or the project with greater NPV as compared to others. (BusinessDictionary.com, 2015) One of the advantages of using NPV is that it takes account of time value of money and it also incorporates the risk factor while assessing an project however it doesnt predict how long the project will take to recover the investment, Internal Rate of Return The discounted cash flow rate of return, or internal rate of return, provides analysts a way to determine the rate of return provided by the investment. Generally speaking, IRR is the rate at which NPV of the given project is equal to zero. The higher the better. One of the main issues of using IRR method is that it sometimes provides multiple rates which may confuse the users. (Kinney, Prather-Kinsey and Raiborn, 2006) Payback Period Payback period allows to estimate how long the project will take to recover the investment. One of the main advantages is that it allows for an easy interpretation by stakeholders of the company when the investment will be recovered. However it fails to incorporate time value of money. (McAllister, 2005) 0 1 2 3 4 investment -900000 Sale 5670000 5953500 6251175 6563733.75 Variable cost -2970000 -3118500 -3274425 -3438146.25 depreciation -237500 -237500 -237500 -237500 fixed cost -2000000 -2000000 -2000000 -2000000 Profit 462500 597500 739250 888087.5 tax -185000 -239000 -295700 -355235 depreciation add back 237500 237500 237500 237500 operating cash flows 515000 596000 681050 770352.5 working capital -100000 100000 Salvage value 50000 Net cash flows -1000000 515000 596000 681050 920352.5 NPV $1,121,200.52 IRR 49% MIRR 32% Payback 1.813 Considering all factors such as positive NPV, high IRR and low Payback period, project is acceptable. selling price NPV 1.9 11102.1873 2 566151.353 2.1 1121200.52 2.2 1676249.68 2.3 2231298.85 Project still provides positive NPV regardless of above changes in selling process. References: BusinessDictionary.com,. (2015).What is net present value (NPV)? definition and meaning. Retrieved 29 March 2015, from https://www.businessdictionary.com/definition/net-present-value-NPV Kinney, M., Prather-Kinsey, J., Raiborn, C. (2006).Cost accounting. Mason, Ohio.: Thomson/South-Western. McAllister, E. (2005).Pipeline rules of thumb handbook. Amsterdam: Elsevier.