Net Present value Essay Example | Topics and Well Written Essays - 1250 words

Net Present value - Essay Example There are various methods available for appraisal of a project like Net Present Value, Pay back period and others. Here we are using NPV and payback method to analyze the project. Let us start with NPV method. NPV method recognizes the fact that a pound today is worth more than a pound tomarrow. NPV is ‘a calculation in dollars of the present value of all future cash flows from a project. It is roughly analogous to the concept of profit.’(Gary Heerkens, page 59) The total production per week is 1000 units and accordingly 52000 units for the year. As per information provided the contribution or profit per units will be  £0.20 and as the sale for the year is 52000 units, total contributions towards profit is  £10400. As the fixed operation cost will get reduced to  £ 20000 on installation of equipment, the contribution after meeting variable cost would be £ 30400 for each of 10 years except for 5th year, when the unit will be closed for overhauling for 4 weeks. In the fifth year the contribution will be  £29600. As there will also be an overhauling cost of  £8000, the net profit will reduce to  £1600 as compared to  £10400 in each year. However, in the 10th year the residual value of equipments of  £1000 will increase the profits to  £11400. These profits represent cash inflows for each year as depreciation on equipment has not been considered for calculation of such profits. These cash flows have been discounted at the rate of 20% (PVIF table multipliers for each year) in order to calculate the present value of cash inflows from the project.