Net Present Value Analysis

Calculate the NPV:



The net present value calculation is the total present value of a time series of cash flows. The NPV is one of the most used tools to measure the excess or shortfall of cash flows. This method is used for capital budgeting. The NPV has the advantage of showing the returns on the original money invested, moreover, it is a direct measurement of the dollar contribution to the stockholders. One of the disadvantages of the NPV method is that the project size is not measured; also, this method can provide conflicting answers when compared to mutually exclusive projects, that means two projects that can not happen at the same time, however, it is the most used method when making a financial decision to accept a project or to reject it.

For Guillermo, the addition of the advance equipment to improve its business scenario can be analyzed with the NPV. For this we require the time period and a discount rate. The cash flows were calculated for twenty years to capture the effect of the building being fully depreciated for the current business.


First, the income tax was subtracted from the net profit. Then we add back the depreciation charged. For Guillermo furniture’s company, the excel sheet mentions that the building has been depreciated for 13 years, in other words it must be depreciated for 17 years more. Further, since the value of the equipment is not given, in case of hi-tech and broker business, the total value of the equipment will be $1,000,000.

If this is depreciated straight line over a period of ten years, the yearly depreciation will be $100,000. Now after the ten year period is over the income before taxes of hi-tech and broker will increase by $100,000. The firm will have to pay taxes on it at the rate of 42% and so the cash flow becomes less by that amount. In case of current business, the net income before taxes increases by $50,000 after 17 years as the building has now been fully depreciated. In other...