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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%.
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