Scribd
Upload
14 views2 pages

Example Ni NPV

Honley Medical is evaluating the production of a home blood pressure instrument, requiring an initial investment of $360,000. Expected annual net cash flows are $120,000, and after calculating the Net Present Value (NPV), it amounts to $117,960. Since the NPV is positive, Honley should proceed with the project.

Uploaded by

heeljamie26
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
14 views2 pages

Example Ni NPV

Honley Medical is evaluating the production of a home blood pressure instrument, requiring an initial investment of $360,000. Expected annual net cash flows are $120,000, and after calculating the Net Present Value (NPV), it amounts to $117,960. Since the NPV is positive, Honley should proceed with the project.

Uploaded by

heeljamie26
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
You are on page 1/ 2

Example

Honley Medical is considering producing a home blood pressure instrument.


Equipment costing $320,000 plus $40,000 increase in working capital would be
required for the project. Annual net cash flows of $120,000 are expected and
Honley requires a 12% rate of return. Should Honley produce the new product?
CASH FLOW: Step 1
The first step in calculating NPV is to determine the total cash flows of the
project.

Step 1: Cash Flow Identification


Year Item
Cash Flow
0 Equipment……………………………………………………..
$(320,000)
Working Capital………………………………………………
(40,000)
Total…………………………………………………………..
$(360,000)
1-4
Revenues……………………………………………………….. $ 300,000
Operating
expenses…………………………………………. (180,000)

Total……………………………………………………………. $ 120,000
5
Revenues……………………………………………………….. $ 300,000
Operating
Expenses…………………………………………. (180,000)

Salvage………………………………………………………….. 40,000
Recovery of working
capital………………………………. 40,000

Total……………………………………………………………. $ 200,000

CASH FLOW: Step 2


The second step is to calculate the present value of the annual cash flows.

Step 2A: NPV Analysis


Year Cash Flow Discount Factor
Present Value

1/(1+r)^n Cash Flow x Discount Factor


0 $(360,000) 1.000
$(360,000)
1 120,000 0.893
107,160
2 120,000 0.797
95,640
3 120,000 0.712
85,440
4 120,000 0.636
76,320
5 200,000 0.567
113, 400
Net Present Value
$ 117,960

Step 2B: NPV Analysis


Year Cash Flow Discount Factor
Present Value
0 $(360,000) 1.000
$(360,000)
1-4 120,000 3.038
364,560
5 200,000 0.567
113,400
Net Present Value
$ 117,960

The NPV is positive and because of that Honley Medial should proceed with the
production of the home blood pressure instrument.

You might also like