Page 17 - PowerPoint Presentation
P. 17
CAPITAL INVESTMENT APPRAISAL
Net Present Value (NPV)
Net present value =
• Present value of future cash flows discounted at the target WACC
less the cost of the investment.
Where a company accepts a project with a positive NPV the
value of the company increases by that amount – therefore
this method selects projects which maximise the value of the
company (shareholder wealth).
Example:
Project A requires a cash injection of R150 000 today. It will
generate cash flows of R85 000, R65 000 and R45 000 pa over
the next 3 years. What is the net present value of the project
if the discount rate is 7%.
17
