# NPV Formula: Capital Budgeting Report

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Updated: Mar 24th, 2021

NPV is the difference between the initial cash input to a project and expected cash inflows from the project. The sign of the value of the NPV is very significant. A positive value indicates that the project is viable where as a zero indicates that the input to the project and the returns are equal. A negative value indicates that investment is not worthy of the money that is about to invest in it as the returns will be less than the expenditure.

## NPV Formula Where; CF represents the amount

K represents the rate.

CFO represents the initial expenditure.

From the equation,

12 % revenue.

Note: all the values used are in millions of dollars.

NPV= -150

NPV=-117.857

Extra 10% revenue.ie 22%.

NPV= -150

NPV=-120.4918

10% lower revenue.

NPV= -150

NPV=-114.7058

With a growth of 2%,

### Year 2

NPV= -150

NPV=-118.421.

### Year 3

NPV= -150

NPV=-118.9655.

It is evident that the NPV becomes more negative with the increase in revenue.

With a 5% growth in revenue,

NPV= -150

NPV=-119.2307.

NPV= -150

NPV=-120.4918

If the revenues grow by a rate of 5% every year the NPV becomes more negative hence investing in the project becomes more costly than when the revenue grows with a rate of2%yearly.

 Revenue NPV(millions of dollars) 5% -115.7143 10% -117.2727 15% -118.6956 20% -120.0000 25% -121.2000 30% -122.3077 From the graph, it is seen that the NPV does not become positive. This is a clear indication that the project is not viable as the returns are not worth that is the expenditure is more than the income from that project.

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IvyPanda. "NPV Formula: Capital Budgeting." March 24, 2021. https://ivypanda.com/essays/npv-formula-capital-budgeting/.

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IvyPanda. 2021. "NPV Formula: Capital Budgeting." March 24, 2021. https://ivypanda.com/essays/npv-formula-capital-budgeting/.

References

IvyPanda. (2021) 'NPV Formula: Capital Budgeting'. 24 March.