1
BUS 5111-01 –Financial Management
Cash Flows and Discount Cash Flow Analysis
Written Assignment Unit 2
Dr. Geetika Arora
September 2022
2
Introduction:
There is no doubt that every company seeks to achieve the largest possible profit,
especially when the project is an investment and extends for several years. Here, the
company's management must work on making a correct investment decision, depending
on the capital budget, especially the calculation of the net present value, and in light of
this, the decision can be taken to invest in the project or not.
Through this research, I will discuss the net present value and how to calculate it,
through the data available to me about the WePROMOTE company owned by me and
my partner.
"The net present value, by definition, is the difference between an investment's cash
inflows and cash outflows over a certain period". ( Kristiani, 2022)
Net present value calculation
First, I will calculate the net present value according to my partner's perception and
use the excel tables to get the most accurate results.
Discount Rate 0.07
Year Year Year Year Year Year Year Year
Year
0 1 2 3 4 5 6 7
cost of the
equipment
price (80,000) - - - - - - 5,000
Cash Flows 14,000 14,000 14,000 14,000 14,000 14,000 14,000
DF (7%) 1 0.9346 0.8734 0.8163 0.7629 0.7130 0.6663 0.6227
PV (80000) 13,084 12,228 11,428 10,681 9,982 9,329 11,832 78,564
(1,436.20)
NPV
3
From the previous table, the net present value was calculated by finding the difference
between cash inflows and outflows. It turns out that the NPV is negative.
VPV = -1436.20. So, this project cannot be pursued, because the NPV is negative and
less than zero, and it is recommended not to undertake the project.
Second, according to my conviction of cash flows during the seven years, I will
calculate the net present value according to the table below.
Discount Rate 0.07
Year Year Year Year Year Year Year
Year
0 1 2 3 4 5 6 Year 7
cost of the
equipment
price (80,000) - - - - - - 5,000
Cash Flows 14,000 16,000 16,000 16,000 17,000 17,000 17,000
DF (7%) 1 0.9346 0.8734 0.8163 0.7629 0.7130 0.6663 0.6227
PV (80000) 13,084 13,975 13,061 12,206 12,121 11,328 13,700 89,475
9,475.30
NPV
We note that the NPV according to my personal opinion in the distribution of cash
flows over the seven years was positive, as VPN = 9475.30 which is a positive value
and greater than zero, so I advise investing in the project because according to the
NPV indicator, the project will be feasible and profitable.
I can explain to my partner the meaning of long-term investment and what are the
indicators of the profitability of the project and explain some of the authors'
statements on this topic. "Business owners depend on knowing how much money will
be spent on long-term investments and how much cash will come from these
investments". (Heisinger & Hoyle, nd)
4
I compare my partner's NPV through the tables above. When the positive net present
value becomes clear to us, this means that the rate of return will be higher than the
discount rate, which qualifies us to profit from the project.
"A positive NPV for a project or investment means that the rate of return is higher
than the discount rate". (Fernando, 2022)
conclusion
One of the most important steps for starting an investment project is to rely on the
capital budget decision and work on finding indicators such as the net present value,
the internal rate of return, and the payback period, to know the destination of the
investment project, whether it is feasible, profitable or losing. To take the appropriate
decision to proceed with the project or not. Each administration must pay attention to
this aspect so as not to fall into a loss after an investment that could extend for
decades.
5
References:
Kristiani, V. (2022, Mar 5). Net Present Value (NPV): Definition, Benefits, Formula,
and Examples. Retrieved from https://www.hashmicro.com/blog/net-present-
value-npv/
Heisinger, k., & Hoyle, J. (nd). Accounting for Managers. Retrieved from
https://2012books.lardbucket.org/books/accounting-for-managers/index.html
Fernando, J. (2022, Aug 5). Net Present Value (NPV): What It Means and Steps to
Calculate It. Retrieved from https://www.investopedia.com/terms/n/npv.asp
