Example of NPV Value
A company is faced along with the following five (5) investment opportunities as:
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Cost
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NPV
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P.I = Total P.v___ Initial capital
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P.I Ranking
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1.
2.
3.
4.
5.
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500,000
100,000
400,000
200,000
160,000
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150,000
40,000
40,000
100,000
90,000
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1.3
1.4
1.1
1.5
1.6
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4
3
5
2
1
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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