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Guillermo Furniture: Project future cash flows over the life

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What information is needed to determine the present value of an investment? Using the information in the Guillermo Furniture Scenario and spreadsheet, how would you project the future cash flows each year over the life of one of the investment alternatives being considered? (Please provide a specific example.)

How does a company determine what discount (interest) rate to use when computing present value? Think about today's economy. How would you use the current information to determine the value of an investment today? Would it be higher or lower than it was a year ago? Why?

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Solution Summary

Your tutorial is 508 words and describes what you need to create an NPV, uses the data in the case to show the NPV of a potential choice, and discusses how the discount rates are determined. Three different discount rates are used for the same decision so you can see how changing discount rates change the NPV. It takes some background in NPV to review this (not for brand new novices).

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See attached file.

To determine NPV, you need the amount of the current investment (dollar outlay), the future projected after tax cash flows, and a discount rate.

One of the alternatives is that Guillermo could do what the others in the industry are doing - that is "consolidating into larger organizations by merger or acquisition." To get the NPV for this decision, you would estimate the cost of acquiring another organization, forecast the incremental future after-tax cash flows and see if the investment yields a positive cash flow. For instance, if the acquisition is a similar size to this firm, with total asset also of $1,348,829 and overall net income of $ 188,114 (see excel attached for computation), then we can estimate NPV based on an assumption that there would be a 25% savings in overhead ...

Solution provided by:
Carol Sargent, PhD
Education
  • BSc, University of Virginia
  • MSc, University of Virginia
  • PhD, Georgia State University
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