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NPV Analysis
Name
Institution
Date

Introduction
• Capital investments usually involve an initial capital outlay, followed by a

decline of cash flows resulting from expense reductions or increase in cash
inflows resulting from revenue gains.

• The NPV takes into consideration the time value of money
• The discount rate is used to reduce the future cash flows to their present
values

• If the net present value is positive, the project is approved, otherwise, it is
rejected.

Considerations
Factors considered in the NPV analysis;
• Throughput on goods sold
• Cash resulting from the sale of asset
• Maintenance costs
• Working capital
• Depreciation effects
• Tax payments

NPV for Flash Memory case
• The NPV analysis results to the following;
Year

0
1
2
3
4
5
NPV
IRR

Cash flows
-$7,848
$225
$2,564
$7,009
$2,843
$2,127
$3,014
21.9%

• NPV is positive indicating the project is
profitable and viable
• Additionally, the IRR is greater than cost
of capital
• As such, the introduction of new product
line will result to net gain.
Recommendation
The investment proposal should be pursued

Financing option
• The company has already exceeded its loan limit in the current loan
agreement.

• Issuing new debt would surpass the company’s target for debt-to-capital of
18%.

• As such, the company should pursue the equity financing option for the new
product line.

References
• DeFusco, R. A., McLeavey, D. W., Anson, M. J., Pinto, J. E., & Runkle, D. E.
(2015). Quantitative investment analysis. John Wiley & Sons.


Flash Memory, Inc.
Exhibit 1 Actual and Forecasted Financial Statements Assuming No Investment in New Product Line, No Sale of New
Common Stock, and All Borrowings at 9.25%
Income Statement ($000s except EPS)
Actual

Forecast

2007

2008

2009

2010

2011

2012

$77,131
$62,519
81.1%
$14,612

$80,953
5.0%
$68,382
84.5%
$12,571

$89,250
10.2%
$72,424
81.1%
$16,826

$120,000
34.5%
$97,320
81.1%
$22,680

$144,000
20.0%
$116,784
81.1%
$27,216

$144,000
0.0%
$116,784
81.1%
$27,216

$3,726
4.8%
$6,594
8.5%
$4,292

$4,133
5.1%
$7,536
9.3%
$902

$4,416
4.9%
$7,458
8.4%
$4,952

$6,000
5.0%
$10,032
8.4%
$6,648

$7,200
5.0%
$12,038
8.4%
$7,978

$7,200
5.0%
$12,038
8.4%
$7,978

$480

$652

$735

-$39

-$27

-$35

$937
9.25%
-$50

$1,323
9.25%
-$50

$1,565
9.25%
-$50

Income before income taxes

$3,773

$223

$4,182

$5,661

$6,604

$6,363

Income taxes
- % of income before taxes
Net income

$1,509
40.0%
$2,264

$89
39.9%
$134

$1,673
40.0%
$2,509

$2,264

$2,642

$2,545

$3,396

$3,963

$3,818

$1.52

$0.09

$1.68

$2.28

$2.66

$2.56

Sales
- YOY growth
Cost of goods sold
- % of sales
Gross margin
Research and development
- % of sales
Selling, general and administrative
- % of sales
Operating income
Interest expense
- Interest rate %
Other income (expenses)

Earnings per share

$128,000
-11.1%

$105,000
-18.0%

Exhibit 1 (continued)
Balance Sheet ($000s except shares outstanding and book value per share)
Actual

Forecast

2007

2008

2009

2010

2011

2012

$2,536
3.3%
$10,988
33
$9,592
56
$309
0.3%
$23,425

$2,218
2.7%
$12,864
33
$11,072
59
$324
0.2%
$26,478

$2,934
3.3%
$14,671
37
$11,509
58
$357
0.2%
$29,471

$3,960
3.3%
$19,726
60
$13,865
52
$480
0.4%
$38,031

$4,752
3.3%
$23,671
60
$16,638
52
$576
0.4%
$45,637

$4,752
3.3%
$23,671
60
$16,638
52
$576
0.4%
$45,637

$5,306
$792
$4,514

$6,116
...