Determine the npv of a company, Finance Basics

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Example of NPV Value

A company is faced along with the following five (5) investment opportunities as:

 

Cost

NPV

P.I = Total P.v___             Initial capital

P.I Ranking

1.

2.

3.

4.

5.

500,000

100,000

400,000

200,000

160,000

150,000

  40,000

  40,000

100,000

  90,000

1.3

1.4

1.1

1.5

1.6

4

3

5

2

1

This company has 750,000/= available to investment projects, three and four are equally exclusive.  All of the projects are divisible. Such group should be selected in order to maximize the NPV.  Specify this NPV figure.

Solution

By using PI to rank the projects in order of preference 5, 4, 2, 1, 3.

In order to maximize NPV, the following projects combination must be chosen as:

                                                                                             Shs.

Funds available for investment                                                 750,000

Cost of project:        5             160,000

                              4              200,000

                              2              100,000

                              1              290,000                                     (750,000)

                                                                                                 NIL

NPV = 90,000 + 100,000 + 40,000 + (290,000/500,000) * 150,000   = 317,000


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