Analysis of Net Present Value

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Every capital investment consists of the initial cash and other forms of revenue. Sometimes there are decreases in the flow of existing cash that may be as a result of reduced expenses. This information can be presented on a spreadsheet as a best practice, to show the expected cash flow and to apply a discount rate. The information can also be used to show the information that is important for best practices to assist business owners. All this is possible through calculations known as the “Net Present Value Analysis”.

This calculation is a traditional method or approach used for evaluating the Capital Proposals for best practices. It is based on the use of the cash flow as the single factor. This value can be used to evaluate future proposals that may be forwarded to the company to ensure best practices.

Example for Net Present Value Analysis

Consider a company, HoX International that has plans to acquire an asset for best practices. It expects this asset to yield substantial cash flow for the at least five years from the time of purchase. The capital cost is 10%, and the company uses this percentage as a discount rate to construct the net present value for this project. With best practices the following data is collected:

From the data above, at a 10% discount rate, the net present value of the project is negative. Therefore, HoX International should not go ahead with this investment to ensure best practices and risk management.

With the 10% discount, the factor continues to become smaller with time. This is because the value of discounted cash flow reduces with progressing time until the present. As a best practice, the discount factor can be derived using the following formula:

Present Cash Flow Value =          Future Cash Flow

(1 + Discount Rate) x

Where, “X” represents the number of periods of discounts.

Consider the following example: If a receipt of $200,000 was issued for 3 years for best practices, with the discount of 10%. The calculation will be as follows:

Present Cash Flow Value =          $200,000 =             $150,263

(1 + .10) 3

Components of the Net Present Value Analysis

What makes up the net present value analysis includes the following components that are part of best practices:

  • Purchased Assets: This includes all the purchases, installations, deliveries and tests of assets belonging to the company
  • Expenses Linked To Assets: These are ongoing expenses like property taxes, warranties, maintenance and others related to the assets of the company
  • Margin of Contribution: This is any increment in cash flow obtained from sales linked to the project
  • Depreciation Effect: When there is depreciation, the income tax reduces, so it is important to keep an eye on the depreciation effect
  • Reduction in Expenses: For example using automation processes to eliminate expenses due direct labor is a reduction in expense
  • Tax Credits: If a purchase triggers the tax credit, it must be noted
  • Taxes: These are all the income tax payments that may be resulting from the asset
  • Changes in Working Capital: This included changes in the accounts receivable, and accounts payable and the inventory

Analyzing Net present value is a very sensitive best practice and requires a lot of accuracy.

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