Lesson 4 pp4.ppt
- 1. Net Present Value When we evaluate projects we must look at future cash inflows WHY?????
- 2. Net Present Value FORMULA PV = Future Value / (1 + rate) n – N is the power for the number of years (you won’t need to know this) – Lets look at table 7.5 on page 362. Here we can see the initial outlay of 50000. We can also see the project goes for 5 years using a rate of 10%. We have also estimated the receipts. The final figure is 51 353 which indicates a positive return on the investment – WHY?
- 3. For your interpretation Evaluate the project on the top of page 363. – Is this viable? Why? – Why would a business want to know what is going to happen in the future? Questions for you to do now Using the same format as above calculate the NPV for the following question. Project Y with an outlay of 120 000 with estimated receipts of Yr 1 - 30 000, Yr 2 - 20 000, Yr 3 - 25 000, Yr 4 - 40 000, Yr 5 - 25 000 Rate is 9%
- 4. Financing Strategy When choosing the suitable type and amounts of finance, the wrong choice can be very costly to the business, while poor financial strategy can result in over or under capitalisation. Under Capitalised – Not enough cash to run the business efficiently on a daily basis. This can cause a business to fall behind their competition and have sever long term cash flow problems Over Capitalised – Too many funds not being used wisely. They are not being used to generate income.
- 5. Question Answer question 2 on page 364 in a paragraph of 200 words. Make sure to give valid reasons to support your opinion.