Running Head: NET PRESENT VALUE
Net Present Value
NET PRESENT VALUE
Net Present Value is a Discounted Cash Flow (DFC) method - under capital budgeting that computes the projected earnings of an investment or a project by discounting its expected
future cash flows- both outflows and inflows- to the present point, with the use of a required rate
of return (Oliver, 2012). Alternatively, it can be defined as a summation of the total PV of the cash
flows in each period (Doss, Sumrall, & Jones, 2017). Positive Net Present Values are usually
considered for selection. To compute the NPV, we first should calculate the cash inflows and
outflows for the project, which is going to be implemented.
Computation of cash inflows from sales for 4 years
As asserted by the instructions, the unit price for each zither is $750. Additionally, it is
expected that the company will make 3600 sales in the 1st year, 4300 sales in its 2nd year, 5,200
sales in its 3rd year, and 3,900 sales in its 4th year. The total sales of each year are thus computed
by generated the unit price of $750 by the unit sales. Following this is to compute the cash
outflows, as shown in the table below 2. The question states that the fixed costs of each of the four
years are $415,000. The variable costs (VC), on the other hand, amounts to 15% of the total sales.
For this reason, the VC for the first year will be computed as (15%*2,700,000). This gives the
result of $405,500. The same procedure is followed for the other three years. The total cost is then
computed by adding up the variable cost of each year with the fixed cost of that year. For year one,
it will be: 415,000 + 405,000 = 820,000.
NET PRESENT VALUE
Computing Cash Outflows
Fixed Cost (FC)
(15% of Sales)
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