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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

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= Equation -150

NPV=-117.857

Extra 10% revenue.ie 22%.

NPV= Equation -150

NPV=-120.4918

10% lower revenue.

NPV= Equation -150

NPV=-114.7058

With a growth of 2%,

Year 2

NPV= Equation -150

NPV=-118.421.

Year 3

NPV= Equation -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= Equation-150

NPV=-119.2307.

NPV= Equation-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
NPV vs REVENUE

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. (2021, March 24). NPV Formula: Capital Budgeting. Retrieved from https://ivypanda.com/essays/npv-formula-capital-budgeting/

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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.

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