Financial Management

6 Pages 1599 Words

ied before the appraisal can be undertaken.

Net Present Value Analysis:- Regardless of the application, we should use this 5-step process in net present value analysis:

Step 1 - Select the discount rate.
Step 2 - Identify the costs/benefits to be considered in analysis.
Step 3 - Establish the timing of the costs/benefits.
Step 4 - Calculate net present value of each alternative.
Step 5 - Select the offer with the best net present value.



Example:-

Lester company has an investment opportunity with an economic life of 5 years. Salvage value of equipment is estimated at $5,000. At the end of five years, the working capital will be released. Lester uses a discount rate of 10%. The following costs and revenues are estimated

Cost of capital equipment $160,000
Working capital required 100,000
Relining equipment in 3 years 30,000
Annual sales revenue 750,000
Annual cost of sales 400,000
Annual operating expenses 270,000


Cash 10% ...