Suppose Micron Technology (NasdaqGS: MU - http://ca.finance.yahoo.com/q?s=MU&ql=0) is considering a new project that will cost $2,225,000 (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 9%, 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.
You may use the following steps to calculate NPV:
1) Calculate present value (PV) of cash inflow (CF)
PV of CF = CF1 / (1+r)1 + CF2 / (1+r)2 + CF3 / (1+r)3 + CF4 / (1+r)4 + CF5 / (1+r)5
2) Calculate NPV
NPV = Total PV of CF - Initial cash outflow
-Initial cash outflow + Total PV of CF
r = Discount rate (9%)
If you do not know how to use calculator, please use the present value tables.
Brealey, R.A., Myers, S.C., & Allen, F. (2005). Principles of corporate finance, 8th Edition. The McGraw?Hill. Retrieved May, 2012, from http://jcooney.ba.ttu.edu/fin3322/Brealey%20Files/Appendix%20A%20-%20Present%20Value%20Tables.pdf (Please use Table 1)
PV of CF = CF1 / (1+r)1 + CF2 / (1+r)2 + CF3 / (1+r)3 + CF4 / (1+r)4 + CF5 ...
The following posting helps calculate net present value.