Net Present Value Case Study
Net Present Value
BN160722
BUS 550 Financial Management
Professor: Dr. Stephen Hawn
Westcliff University
22/01/2017
Abstract
This study is conducted to determine which forklift system should Premium Manufacturing Company purchase using Net Present Value (NPV) approach. This study will be discussing about Net Present Value Method in detail. This paper will also show the advantage and disadvantage of Net Present Value (NPV) method.
Introduction
Net Present Value Method is a capital budgeting techniques that assesses a capital investment by discounting its future cash flows to their present values and subtracting the amount of the initial investment from their sum (Needles, Powers & Crosson, 2010). In other words,
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Thus, if the net present value is positive, the rate of return on investment will be greater than the minimum rate of return of the organization. Therefore, the project can be accepted.
Negative NPV:
The net present value is said to be negative if the present value of cash inflows is less than the present value of cash outflows. Thus, if the net present value is negative, the rate of return on the investment will be less than the company’s minimum rate of return. Therefore, the project should be rejected.
Zero NPV:
The net present value is said to be zero if the present value of cash inflows is equal to the present value of cash outflows. Thus, if the net present value is zero, the project meets the company’s minimum rate of return. Therefore, the project can be
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Since the NPV of Otis forklift system is higher than the NPV of Criagmore forklift system, Premium Manufacturing Company should purchase Otis forklift system.
Conclusion
This study shows that Premium Manufacturing Company should purchase Otis forklift system compare to Craigmore forklift system. It is because the NPV of Otis forklift system (i.e. $ 337415.93) is higher than the NPV of Craigmore forklift system (i.e. $ 91,018.4).
Reference
Crundwell, F. (2008). Finance for Engineers: Evaluation and Funding of Capital Projects. Berlin:
Springer Science & Business Media.
Needles, B. E., Powers, M., & Crosson, S. V. (2010). Principles of Accounting. Boston: Cengage
Learning.
Shim, J. K., & Siegel, J. G. (2007). Handbook of Financial Analysis, Forecasting and
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