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Net Present Value Analysis

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L&M Power

In the next two years, a large municipal gas company must begin constructing new gas storage facilities to accommodate the Federal Energy Regulatory Commission's Order 636 deregulating the gas industry. The vice-president in charge of the new project believes there are two options. One option is an underground deep storage facility (UDSF) and the other is a liquified natural gas facility (LNGF). The vice-president has developed a project selection model and will use it in presenting the project to the president. For the models she has gathered the following information:

Initial Cost Operating Cost/Cu. Ft. Expected Life Salvage Value
UDSF $10,000,000 $0.004 20 years 10%

LNGF 25,000,000 0.002 15 5

Since the vice-president's background is in finance, she believes the best model to use is a financial one, net present value analysis.

Questions: Would you use this model? Why or why not?

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//Before writing about the Net present Value Method, it is necessary to have knowledge about the method of Net present Value Analysis. One should know about the process of this analysis, which further will assist in analysis of Net present Value, in an effective manner//

Net present Value Method

The Net present Value Analysis is the best method in taking the decisions for selecting the project. Yes, I would use this model as it is a discounted cash flow technique that explicitly recognizes the time value of money. It correctly postulates that cash flows arising at different time periods differ in value and are comparable only when their ...

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  • BBA, University of Rajasthan
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