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Accurate of Net Present Value Calculation

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.

Solution Preview

The NPV of proposed projects is definitely not accurate. There are so many assumptions going into the calculation that it is difficult to come up with an accurate number. The initial investment number is probably the most accurate. However, the rest of the numbers such as projected revenues, operating expenses, ...

Solution Summary

The solution goes into detail about NPV and concisely explains the concepts and details behind the answer. The solution also explains which kind of project will have the most accurate NPV calculations. NPV is not perfect and this answer explains why that is the case. The solution is 222 words in length.

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