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.
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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.
Extra 10% revenue.ie 22%.
10% lower revenue.
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With a growth of 2%,
It is evident that the NPV becomes more negative with the increase in revenue.
With a 5% growth in revenue,
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)|
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.