Net Present Value (NPV) analysis is a method of calculating the expected net monetary gain or loss from a project by discounting all expected future cash inflow and outflow to the present point in time.
(a) What does positive and negative NPV indicate?
(b) A taxi driver is considering the purchase of a taxi, which would cost Rs 1,000,000.00. He assumes a discount rate of 14 % and has estimated his
net cash flow as follows:
Year 1 - Rs 250,000.00
Year 2 - Rs 300,000.00
Year 3 - Rs 375,000.00
(i) Provide the formula for NPV calculation and a brief description of the components included in the formula.
(ii) Determine the NPV for the above.
(iii) Discuss on the advice that you would give to the taxi driver based on the results.
(iv) It is estimated that the taxi will be used for two more years and the net cash flow would be Rs 400,000.00 and Rs 420,000.00 for the fourth and fifth year. Calculate the new NPV and discuss on it
(c) Discuss on ways quality can improve profitability of a company.