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.
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.