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Accuracy of using the NPV to evaluate particular new projects

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How accurate do you think a company's estimates of the net present value of a proposed project are? Refer to both the initial investment and to the components of the cash flow: revenues, operating expenses, depreciation, taxes, and the cost of capital to use for the computation of the present value.

Keep in mind that NPV is the value in today's dollars of cash flows to be received some time in the future (just like the gold mine example back in Module 2) minus what we have to pay today to get those cash flows.

Which of the following do you think would give you the most accurate NPV calculation:

(a) a brand new retail startup
(b) a pharmaceutical company introducing a new drug
(c) a company with a successful product in Chile trying to introduce it to the USA.

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Solution Summary

This solution provides a detailed discussion net present value (NPV) of the given business finance problem.

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The accuracy of a company's estimates of the net present value of a proposed project is determined on the accuracy of collected information and the sources this information is obtained through. Calculating the NPV and arriving at a positive amount for the project would determine that the project should be accepted and implemented. Net Present Value (NPV) is "the difference between the present value of cash inflows and the present value of cash outflows. NPV is used in capital budgeting to analyze the profitability of an investment or project. NPV analysis is sensitive to the reliability of future cash inflows that an investment or project will yield" (Investopedia, 2011). Determining the value of the dollar today and the value of the dollar in the future to understand the NPV is tricky and detrimental to the project's success. If the analysis is determined on unreliable information or is stretched in any way from actual, this will put the whole project in jeopardy ...

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