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Net Present Value

The Net Present Value (NPV) analysis is used to help company evaluate the merits of a project. Typically, the higher the NPV means the better the project. Performing this analysis required the knowledge of discount rates as well as estimation of future cashflow of the project. This would mean estimating the company beta to calculate WACC and forecasting for annual cashflows. ChiSquares has the expertise to estimate the company beta appropriate for your company and through our expertise in forecasting and decision analysis, we help provide better estimate for the future annual cashflows. This helps companies to evaluate the merits of a project better. Traditionally, many companies used debt as the discount rate to evaluate a project is unfortunately incorrect unless the capital is financed entirely from debt which normally is not the case. The problem is further exacerbated when most companies lack expertise to forecast the annual casflow.

ChiSquares offer myriad of forecasting techniques ranging from the naive method, moving averages, weighted moving averages, exponential smoothing, exponential smoothing with trend and trend analysis.

Consider the following example. A company is going to purchase new equipment that costs $100,000. Because of the use of the new equipment the company will experience savings over the next 6 years of $22,000; $25,000; $22,000; $21,000; $19,000; and $18,000. At the end of 6 years the company anticipates being able to salvage the machine for $25,000. The company would like to know the net present value using WACC of 10 percent.

net value 1

 

The Solution:

net value 2

This investment generates a positive NPV of $7,603.25.

 

Internal Rate of Return

This Analysis is used to determine the rate of return that causes NPV=0. As we have shown in the previous example. The NPV analysis doesn’t tell you the rate of return of the investment per se but gives you the amount of dollars over/below the required rate. To know such rate, the internal rate of return is performed. Simply put, the NPV gives the dollars, IRR gives the rate. Using the same example of analysing NPV, the IRR is 12.38%. Hence, the investment returned a positive 2.38%.

internal rate