Running head: NET PRESENT VALUE 1
Written Assignment Week 2
Net Present Value for We Promote Company Business Expansion Project
BUS 5111 Financial Management
Term 4, 2018-2019
University of the People
NET PRESENT VALUE 2
Net Present Value for We Promote Company Business Expansion Project
Net Present Value
Used in capital budgeting and investment planning to analyze the profitability of a
projected investment or project, the Net Present Value (NPV) is a calculation that compares the
amount invested today to the present value of the future cash receipts from the investment
(Kenton, 2019).
NPV is calculated by first getting the Present Value = Future Value / [(1+discount
rate)^year] (Seth, 2019). After which, the NPV shall be obtained by adding the present values for
the given period (Seth, 2019).
In the case of We Promote, both partners have given their projected cash inflow for seven
years and an assumed discount rate of 6%.
Table 1: NPV Calculations Based on the Values Given by Two Partners
Partner 1 Partner 2
Year
Cash Flow Present Value Cash Flow Present Value
0 -$75,000 -$75,000 -$75000 -$75,000
1 $15,000 14,150.94 $14,000 13,207.55
2 $15,000 13,349.95 $14,000 12,459.95
3 $15,000 12,594.29 $15,000 12,594.29
4 $15,000 11,881.40 $15,000 11,881.40
5 $15,000 11,208.87 $17,000 12,703.39
6 $15,000 10,574.41 $17,000 11,984.33
7 $15,000 9,975.86 $17,000 11,305.97
Net Present Value $8,735.72 $11,136.88
NET PRESENT VALUE 3
It is worthy to note that due to inflation, the projected value of money or cash inflows
given in the present will not be the same in the future, hence, the discount rate element of the
NPV formula is used to account this (Kenton, 2019). Furthermore, the negative value in year
zero represents the initial investment cash outflow from purchasing the equipment.
A positive net present value indicates that the projected earnings from an investment
exceeds the anticipated costs and can be assumed to be profitable while a negative NPV will
result in a net loss (Kenton, 2019). Therefore, based on the given data alone, the company will
have a positive net present value of $8,735.72 and $11,136.88 respectively, and these values
merit a decision to pursue this business opportunity.
However, the values given in the case study are limited to the acquisition value, projected
cash inflows, and discount rate. Other costs deemed relevant and will have an impact on the cash
flows, such as the maintenance of the equipment, are not included. Taking this into
consideration, another analysis should be performed to arrive at a more accurate net present
value. Should the NPV after the re-calculation becomes negative, the project should not be
pursued.
Assuming that the business partner insists on pursuing the project despite the negative net
present value, the return of investment of 11.64% for seven years will be stressed out.
Furthermore, the costs that might be incurred for the maintenance of the equipment could
decrease the already low net present value. Lastly, the $5,000 estimated value of the equipment’s
parts at the end of seven years is not guaranteed and will depend on the performance and
maintenance of the equipment.
In conclusion, net present value is a useful method to evaluate the profitability of an
investment but it also has certain limitations such as the use of cash flow and cost estimates
NET PRESENT VALUE 4
(Woodruff & Thompson, 2019). In the case of We Promote, the business partners should
consider re-evaluating their expansion plan to include a more solid strategy that will ensure to
generate additional income for the company in order to increase the net present value and cover
all the costs that might be incurred.
NET PRESENT VALUE 5
References
Kenton, W. (2019, February 10). Net present value. Retrieved from
https://www.investopedia.com/terms/n/npv.asp
Seth, S. (2019, February 2). What is the formula for calculating net present value (NPV) in
Excel? Retrieved from https://www.investopedia.com/ask/answers/021115/what-formula-
calculating-net-present-value-npv-excel.asp
Woodruff, J. & Thompson, J. (2019, January 25). Advantages & disadvantages of net present
value in project selection. Retrieved from https://smallbusiness.chron.com/advantages-
disadvantages-net-present-value-project-selection-54753.html
