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rated:
Hi,

I am try to understand the Net Present Value and I found clueless to flow.

My understanding of the Cost Of Capital was the cost that needed to raise the Capital (return of the earning money to people who provide the capital). While Net Present Value was the future earning that "convert" to today day's value.

Table below was the summary from the text book question's answer

* Cost of Capital / Discounted Factor = 12%
Year    | Investment  | Net Cash Flow  | Cost Of Capital  | Present Value
Year 0 | (4,000,000)   |(4,000,000)       | 1.000                 | (4,000,000)
Year 1 |                    | 2,080,000        | 0.893                 | 1,857,440
Year 2 |                    | 2,180,000        | 0.797                 | 1,737,460
Year 3 |                    | 2,280,000        | 0.712                 | 1,623,360

NPV    |                    |                    |                       | (1,218,260)

                                                                                    
Question
1. After 3 years, the business was having NPV of negative value. Mean the business was not making money. Am I Right?

2. What is the meaning of the Present Value from each respective year? Did it mean that the cash flow that generated for respective year and "converted" to present year's value? (mean that the cash generated was getting lesser and lesser)?

Thanks
KC
(Newbie in Finance and Accounting Field)

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rated:
- It doesn't necessarily mean that you're losing money .. what it means is that, you're expecting 12% return, and by discounting the cash flow in today's dollar, it is falling short of that 12% return. When you compute NPV .. you need all the cashflow, including initial $4M investment - punch them in calculator with a required return of 12%.

- Present value .. shown on the last column - i think all they're asking is the PV of each year ... if you add them up from Year 0 ... 4, it would add up to the total NPV.

- Cost Of Capital column i think is showing you the discount factor. Basically you use that to multiple the cash flow to convert it to today's dollar. So col3 * col4 = col5. Although i'm bit confused how they got those numbers ... but the direction makes sense. Basically around $2.2K 4 years from now should be worth less than about $2.1k(very close number) from 3 years from now.

rated:
okay those discount factors seem to be correct ... found another webpage with calculator .. plugged in $1

http://www.aqua-calc.com/page/discounted-present-value-calculato...

rated:
okay those discount factors seem to be correct ... found another webpage with calculator .. plugged in $1

http://www.aqua-calc.com/page/discounted-present-value-calculato...

rated:
alexnkc said:   Hi,

I am try to understand the Net Present Value and I found clueless to flow.

My understanding of the Cost Of Capital was the cost that needed to raise the Capital (return of the earning money to people who provide the capital). While Net Present Value was the future earning that "convert" to today day's value.

Table below was the summary from the text book question's answer

* Cost of Capital / Discounted Factor = 12%
Year    | Investment  | Net Cash Flow  | Cost Of Capital  | Present Value
Year 0 | (4,000,000)   |(4,000,000)       | 1.000                 | (4,000,000)
Year 1 |                    | 2,080,000        | 0.893                 | 1,857,440
Year 2 |                    | 2,180,000        | 0.797                 | 1,737,460
Year 3 |                    | 2,280,000        | 0.712                 | 1,623,360

NPV    |                    |                    |                       | (1,218,260)

                                                                                    
Question
1. After 3 years, the business was having NPV of negative value. Mean the business was not making money. Am I Right?

2. What is the meaning of the Present Value from each respective year? Did it mean that the cash flow that generated for respective year and "converted" to present year's value? (mean that the cash generated was getting lesser and lesser)?

Thanks
KC
(Newbie in Finance and Accounting Field)

  Homework problem?

rated:
fwuser12 said:   alexnkc said:   Hi,

I am try to understand the Net Present Value and I found clueless to flow.

My understanding of the Cost Of Capital was the cost that needed to raise the Capital (return of the earning money to people who provide the capital). While Net Present Value was the future earning that "convert" to today day's value.

Table below was the summary from the text book question's answer

* Cost of Capital / Discounted Factor = 12%
Year    | Investment  | Net Cash Flow  | Cost Of Capital  | Present Value
Year 0 | (4,000,000)   |(4,000,000)       | 1.000                 | (4,000,000)
Year 1 |                    | 2,080,000        | 0.893                 | 1,857,440
Year 2 |                    | 2,180,000        | 0.797                 | 1,737,460
Year 3 |                    | 2,280,000        | 0.712                 | 1,623,360

NPV    |                    |                    |                       | (1,218,260)

                                                                                    
Question
1. After 3 years, the business was having NPV of negative value. Mean the business was not making money. Am I Right?

2. What is the meaning of the Present Value from each respective year? Did it mean that the cash flow that generated for respective year and "converted" to present year's value? (mean that the cash generated was getting lesser and lesser)?

Thanks
KC
(Newbie in Finance and Accounting Field)

  Homework problem?


I mean, in my day we at least tried to hide the fact that we were asking others to do our homework.

rated:

rated:
Hi,

Thanks for other who sharing the idea to me on this topic.
Those are not homework problem.
I am trying my best to understand the concept of NPV and the Cost of Capital (Discounted cash flow) so that I could understand what the reference book try to say.
Those NPV and Cost of Capital look like a good start for me to understand how the company function (from financial point of view)

KC

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