Calculating NPV for a Project

Net Present Value (NPV)
Knowledge Center

Forum
Maboshe Muchula
Student (MBA)

Calculating NPV for a Project

John owns a nursery school. He estimates that, with an extension, he would be able to sell the business as a going concern for $600,000 in six years time. Without the extension, he would expect to sell it for $500,000 in six years’ time. A local builder has recently approached John with an unexpected offer to buy the nursery now for $850,000.
John needs to decide whether to carry on in business without the extension (Option 1), have the extension built (Option 2), or sell to the developer (Option 3). The following information is available.
1. John has already obtained preliminary planning permission for the extension at a cost of $1,200.
2. John’s building costs are estimated to be $85,000. Of this amount, $45,000 relates to materials and must be paid immediately. The balance of the building costs relates to labour and will be paid on completion of the work. The work would take one year to complete. The nursery would still be open as usual during the year so revenue would be unaffected by the building work.
3. The nursery currently generates net cash inflows of $98,000 per annum. With the extension, these would rise to $135,000 once the work is complete. John pays himself a salary, but this amount has already been deducted before arriving at the $98,000.
4. The nursery’s cost of capital is 10% per annum.
5. Assume that all cash flows occur at the end of each year, unless otherwise stated.

Calculate the net present value (NPV) of each option at the business’ cost of capital. Based on these calculations, conclude as to which option John should choose.

 

More on Net Present Value (NPV):
Summary
Forum
NPV of $1 Million for a Project Means What
WHEN to Invest? Investing at the Right Moment...
Calculating NPV with Missing Data
Example of Net Present Calculation
NPV of Partial Payments
How do you Calculate NPV when Initial Investments are Unknown?
Missed Interest in NPV
NPV assumes Certainty of Cash Flows
Calculating Cost per Unit if Zero NPV without any Operating Costs Information
👀Calculating NPV for a Project
NPV Cost Avoidance and Savings
NPV for Leased Equipment versus Purchased Equipment
NPV with a Missing Cash Flow Figure
🔥NPV with Only Costs & IRR
Best Practices
Re-evaluating an investment decision
Operating Cash Flows
Does the Net Present Value (NPV) calculation uses cash inflows or profits?
Choosing between Investments Using a Comparison of NPVs
More Complex NPV Comparison: Interrelated Projects
Special Interest Group

Do you have a keen interest in Net Present Value (NPV)? Become our SIG Leader

Net Present Value (NPV)
Knowledge Center



About 12manage | Advertising | Link to us / Cite us | Privacy | Suggestions | Terms of Service
© 2022 12manage - The Executive Fast Track. V15.8 - Last updated: 1-7-2022. All names ™ of their owners.