UNIT 2 Written Assignment- Calculating NPV AND A CASE Study OF Wepromote Company PDF

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Unit 2: Written Assignment BUS 5111 ‐ AY2022‐T Financial Management Net Present Value: Case Study of WePROMOTE Company University of The People November 2021IntroductionThe Net Present Value otherwise known as “NPV” is a method of project appraisal taking into consideration the time value of money. ...

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Unit 2: Written Assignment BUS 5111 ‐ AY2022‐T2 Financial Management Net Present Value: Case Study of WePROMOTE Company University of The People November 2021

Introduction The Net Present Value otherwise known as “NPV” is a method of project appraisal taking into consideration the time value of money. Net present value (NPV) is the difference between the present value of cash inflows and the present value of cash outflows over a period. NPV is used in capital budgeting and investment planning to analyze the profitability of a projected investment or project (Fernando, 2021). It is widely used in capital budgeting to establish which projects are likely to turn the greatest profit (Jagerson, 2021). Therefore, calculating the NPV of the projected investment of WePromote Company will give the company the ability to know the value of money in the future considering the projected cash outlay, yearly cash inflow to be generated from the investment, the estimated life span of the investment in of years and the discounted rate. This will help in determining the feasibility and the extent of profitability between the two options at stake. From the question, I will provide a narrative of how both computations were calculated and why with justification, present calculated answers in excel sheet format, provide a summary on whether WePromote should continue with the project and make a summary conclusion with compelling and persuasive explanation to my partner in support of my position. Background Information The following items descriptions and relevant values were made available: Projected Investment Outlay: $80,000 Expected Cash Inflow (Partner’s Projection):

$14,000 (annually for 7 years)

Expected Cash Inflow from my scenario: $14,000 for year 1, $16,000 for year 2-4 and $17,000 for year 5-7. Residual Income from the sale of equipment $5,000 (at the end of the 7th year) Discounted Rate:

7%

Formula Used To compute the NPV, the following formulas were used: Using the excel NPV Formula of =NPV(discount rate, series of cash inflow)+(Outflow) Discount Factor formula Using = 1/(1+i)^n to compute the NPV where

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Table 1 NPV using =NPV(discount rate, series of cash flow)+(Outflow) and Discount Factor formula Using = 1/(1+i)^n to compute the NPV. Please see the excel sheet in the separate attachment for more clarification and demonstration. NPV uses discounted cash flows due to the time value of money (TMV). The time value of money is the concept that money you have now is worth more than the identical sum in the future due to its potential earning capacity through investment and other factors such as inflation expectations (Fernando,2021). As shown in the table above, using the excel formula of =NPV(B2,E6:E12)+E5, the second option (My scenario) has a positive NPV of $9,475.30 comparatively to =NPV(B2,B6:B12)+B5 of the first option (My partner’s scenario) that has a negative NPV of -$1,436.20. Overall, this indicates that the investment will be feasible and profitable if embarked upon. In the same vein, using the discounted rate formula of 1/(1+i)^ i.e. 1/(1+i)^ to 1/(1+i)^7 discounted with the relevant PV factor to the yearly cash inflow presents the same result as demonstrated above in the table. Essentially, the areas of divergent view between my partner and I are in the projected yearly inflow from year 2 to year 7 which has however attributed to the difference between the two options. From the computed NPV above, my partner has projected a constant cash inflow of $14,000 each for 7 years. On the other hand, my projected scenario suggested a cash inflow of $14,000 for the first year, $16,000 for the year 2 to

year 4 and $17,000 for year 5 to year 7 respectively. It is instructive to note that the value in year 7 is attributed to the addition of the residual value of $5,000 from the sale of the equipment to the cash inflow for year 7 for both options. The initial capital outlay of ($80,000) remained the same as there was no reported additional cash outlay. Decision Rule: Summary Conclusion Positive NPV A positive NPV indicates that the projected earnings generated by a project or investment—in present dollars— exceeds the anticipated costs, also in present dollars. It is assumed that an investment with a positive NPV will be profitable (Fernando,2021). From my perspective in line with the table above, the project is attractive, increased prospect for profitability and has a positive NPV of $9,475.30. I, therefore, recommend that the project should go ahead given the prospects. This shows an IRR of 11.84% (9475.30/80000*100)

Negative NPV

An investment with a negative NPV will result in a net loss. This concept is the basis for the Net Present Value Rule, which dictates that only investments with positive NPV values should be considered (Fernando,2021). From the perspective of my partner, based on his projection, the project will attract a negative NPV of -$1,436.20, representing non-viability and non-profitability. I recommend that the project should not be embarked on in line with the outcome of the calculation.

In the final analysis, the two options are before my partner to the necessary perusal and to choose between profitability and stagnancy. I will sit with my partner to explain compellingly how my projections were arrived at. The goal of the partnership is to grow the business through systematic progression rather than to remain stagnant for 7 years through the yearly cash inflow of $14,000. The paradigm shift should be towards increasing the profit to sustain the business. I will explain to him the strategic plan towards achieving the projected cash inflow through an increase in market share, entering a new market segment and increase in sales turnover resulting in future cash inflow.

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References.

Fernando, J. (2021, August 29). Net Present Value (NPV). Retrieved from: https://www.investopedia.com/terms/n/npv.asp Jagerson, J. (2021, January 16). What Is the Formula for Calculating Net Present Value (NPV)? Retrieved from: https://www.investopedia.com/ask/answers/032615/what-formula-calculating-net-present-value-npv.asp...