Chapter 5 Measuring Investment Value You Can Trust

NPV of Year End Cash Flows u Calculate the net present value of a

Overview of the Calculation of NPV u On all NPV problems you must u

What Creates a Positive Net Present Value? u How do the following interact to

Meaning of Net Present Value u NPV measures wealth created regardless of whether or

Management’s Role in Helping the Market Assess the NPV of the Firm u Management

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Chapter 5 -- Measuring Investment Value: You Can Trust NPV u Goals for this chapter: u Be able to calculate the NPV for projects with: u. Year-end cash flows u. Midyear cash flows u. Mixed year-end and midyear cash flows u. Understand the meaning of NPV u. Understand management role in conveying information to the market

NPV of Year End Cash Flows u Calculate the net present value of a project with year end cash flows. u. Problems 5 -1 -- Even cash flows u. Problems 5 -4 -- Declining cash flows u. Problems 5 -5 -- Uneven cash flows u. Problems 5 -7 -- Overhaul cost and even cash flows u. Problems 5 -16 -- Growing cash flows u. On all of these problems you can use the NPV function to calculate the present value

Overview of the Calculation of NPV u On all NPV problems you must u First u estimate and then calculate the cash flows for each year Remember inflows are positive and outflows are negative u There are three stages of a projects life The acquisition stage u The operating stage u The disposition stage u u Once the cash flows for each period are estimated they need to be discounted to present by multiplying by 1 / (1 + i )n

What Creates a Positive Net Present Value? u How do the following interact to create a positive net present value? u. Market Imperfections u. Strategy u. Competitive Advantage u. Economic profit

Meaning of Net Present Value u NPV measures wealth created regardless of whether or not the company includes debt in its capital structure. u. Tables 5 -2 and 5 -3 u NPV measures wealth created even in the presence of income taxes. u. Table 5 -4 u The presence of risk changes a NPV to an expected NPV with ranges

Management’s Role in Helping the Market Assess the NPV of the Firm u Management must practice due diligence in estimating the cash flows and NPVs and then keep the shareholders informed so that the market price will equal the intrinsic value over time. u If they do not, difficulties begin when investors are not fully informed and the market price is substantially different from the intrinsic value.