Net Present Value (NPV) method is one of the most important methods which is used to make capital budgeting decisions by almost every company. NPV method is important because it helps financial managers to maximize shareholders' wealth by making better capital budgeting decisions.
Suppose Micron Technology is considering a new project that will cost $3,219,000 (initial cash outflow). The company has provided the following cash flow figures to you:
Year Cash Flow
If the Micron Technology's cost of capital (discount rate) is 5%, what is the project's net present value? Based on your analysis and findings, what would you recommend to the executives and the shareholders of Micron Technology? Should the project be accepted? The shareholders of Micron Technology would also like to know the meaning of NPV concept.
Discount Rate = r = 5%
CF1 = 350,000
CF2 = 939,000
CF3 = 1,122,000
CF4 = 500,000
CF5 = 900,000
PV of Cash inflows = CF1/(1+r)1+CF2 /(1+r)^2+CF3/(1+r)^3+CF4/(1+r)^4+CF5/(1+r)^5
PV of cash inflows = 350000/(1+5%)^1 + 939000/(1+5%)^2 + ...
Solution describes the steps to calculate NPV in the given case and checks if the given project can be accepted.